The Asian Financial Crisis

A simulation of how a central bank can manage its country's monetary policy during a currency crisis.

About the Learning Object

In this learning object, you will take on the role of the Governor of the Bank of Thailand(BOT), the country's Central Bank.

  • Defend the baht that is pegged to the USD, at the cost of high interest rates (hence economic recession)
  • Do not defend the pegged exchange rate system, and allow interest rates to fall and economy to recover

There are two activities in the learning object.

  • Do Activity 1 and learn how the BOT controls the baht through using 2 methods:
    1. open market operation
    2. foreign exchange intervention
  • Do Activity 2 and learn about the dilemma hat BOT faces (to defend baht or to stimulate the economy). We demonstrate using the Thailand case study the dilemma that the central bank faced under three different economic periods (1990 – 1996; Jan-June 1997; July – Dec 1997)

About Bank of Thailand

According to the BOT Act, the central bank is required to among other commitments, to promote monetary stability and formulate monetary policies. The BOT implements monetary policy as specified by the Monetary Policy Committee:

  • mobilizing the deposits,
  • determining the interest rate for loans to financial institutions,
  • trading foreign exchange and exchanging for the future cash flow,
  • borrowing foreign exchange in order to maintain the monetary stability,
  • borrowing money in order to implement the monetary policy,
  • trading securities as necessary and exchanging for the future cash flow in order to control the money supply in the country's financial system, and
  • borrowing or lending the securities with or without returns.

Note: You will also be given interactive diagrams. Accompanying instructions can be found in the respective write ups.

Activity 1

We use the domestic money market and foreign exchange market to demonstrate the workings of monetary policy and exchange rate policy.

We visualize the interdependence between the domestic money market, the foreign exchange market and its effects on the macroeconomic variables (namely value of the currency, quantity of money, interest rates and Gross Domestic Product).

Learning outcome: At the end of this activity, you should be able to:

  • explain how central bank can manipulate the exchange rates through two methods :

    • Method (1): intervening in the foreign exchange market directly, or
    • Method (2): conducting open market operations (through buying / selling of government bonds).
  • analyze the implications of both methods on the exchange rates, money supply, interest rates, and economic growth.

Then we simulate this experiment for Thailand in the periods between 1990 to 1998.

Activity 1: Methods of controlling exchange rates

Activity 2

Simulating the exchange rate crisis in Thailand to identify the macroeconomic challenges, as well as policy responses and tensions faced by the BOT over the periods 1990 - 1998.

Learning Outcome: At the end of this activity, you should be able to:

  • evaluate the consequences of BOT policy responses to ensure sustainability in Thailand's economic growth versus the stability of a fixed exchange rate system in the country
  • argue for a suitable policy response under three different scenarios:
    1. economic boom period between 1990-1996,
    2. period heading to the crisis between January 1997 - June 1997,
    3. and the crisis period itself between July 1997 - December 1997
  • For this simulation, we used the data from the International Monetary Fund and the Bank of Thailand. The graphs and figures below are approximated from Thailand during the period 1990 - 2000.

Activity 2: Case Study - The Asian Financial Crisis in Thailand

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