The Asian Financial Crisis and international reserve accumulation: A robust control approach

Sang Seok Lee*, Sheung Kan LUK

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

Standard macroeconomic models have difficulties accounting for the surge in international reserves of Asian countries in the aftermath of the Asian Financial Crisis of 1997. We propose precautionary demand for saving generated by model uncertainty as an important driver of this phenomenon. Using Korean data, we estimate a simple permanent income model augmented with model uncertainty, find a structural break at the point of the Asian Financial Crisis, and identify a rise in concern for model misspecification which is distinct from an increase in income volatility. The post-crisis concern for model misspecification implies a reasonable detection error probability. We also show that learning serves as an additional powerful amplification mechanism in our framework.

Original languageEnglish
Pages (from-to)284-309
Number of pages26
JournalJournal of Economic Dynamics and Control
Volume90
DOIs
Publication statusPublished - May 2018

Scopus Subject Areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

User-Defined Keywords

  • International reserves
  • Model uncertainty
  • Robust control and learning
  • Structural breaks
  • The Asian Financial Crisis

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