url
27
Aug
2014

## ASIAN CURRENCY CRISIS: Numerical Experiments 2

We now discuss how the benchmark value of r was chosen. According to the IMF World Economic Outlook, the ratio of government revenue to GDP in Korea was roughly 22.0 percent in 1996. Since our model abstracts from investment and from the trade balance, we subtract 27.8 percent from output to ensure that the consumption to output ratio in the model matches the 1996 value in the data, roughly 0.5.

As in Prescott (1987) we set the real interest rate, r, to 4 percent and the inverse of the elasticity of intertemporal substitution, a, to 1.0. Finally, we assume that the average world rate of inflation, я*, is 4 percent. This corresponds approximately to the average rate of inflation in the U.S. over the past 10 years. In the theoretical model we assumed that тг* — 0. Allowing for a positive value of л* means that the government will collect some revenue during the fixed exchange rate regime. However, this does not change any of our conclusions since those seignorage revenues have already been pledged to financing the old level of the website.

Calibrating the Model to Thai Data

According to the Bank of Thailand, total government domestic debt not held by the central bank at the end of December 1996, was roughly 41.7 billion baht or 0.9 percent of GDP. We set b0 = 0.009. The Bank of Thailand estimated that the foreign debt of the public sector in December 1996 was roughly equal to 430.2 billion baht. According to the IFS, net foreign assets of the Thai central bank equaled 988.6 billion baht in December 1996. This suggests that the level of net foreign assets of the consolidated public sector was equal to 558.4 billion baht or 12.1 percent of 1996 GDP. Thus, we set b0 — f0 = —0.112. Using data from the Bank of Thailand we estimate that net foreign debt of the private sector at the end of 1996 was roughly 38.4 percent of GDP, so we set d0 = —0.384.

In Section 6 we argue that a rough estimate of the fiscal cost of the banking bailout to be 30 percent of GDP, so we set ф = 0.3. The parameter Ф was chosen to match the decline in consolidated government assets that occurred in the period leading up to the Thai crisis in July 1997. We estimate that during this period (until the end of June 1997), net assets of the consolidated public sector fell to 7.5 percent of GDP. We set Ф = —0.075.

According to the IMF World Economic Outlook, the ratio of government revenue to GDP in Thailand was 18.9 percent in 1996. As in the Korean case, we subtracted an additional 26.5 percent from output to ensure that the consumption to output ratio in the model equaled the 1996 value of that ratio in the data, roughly 0.5. The remaining parameter values are the same as in the Korean calibration.

We now discuss how the benchmark value of r was chosen. According to the IMF World Economic Outlook, the ratio of government revenue to GDP in Korea was roughly 22.0 percent in 1996. Since our model abstracts from investment and from the trade balance, we subtract 27.8 percent from output to ensure that the consumption to output ratio in the model matches the 1996 value in the data, roughly 0.5. As in Prescott (1987) we set the real interest rate, r, to 4 percent and the inverse of the elasticity of intertemporal substitution, a, to 1.0. Finally, we assume that the average world rate of inflation, я*, is 4 percent. This corresponds approximately to the average rate of inflation in