(Ir)Relevance of Currency Crisis Theory to the Devaluation and Collapse of the Thai Baht

TLDR

The Thai baht’s 1997 devaluation is widely seen as the start of the East Asian crisis, sparking debate over whether it was fundamentals‑based or driven by self‑fulfilling expectations, and this study does not aim to survey the broader currency‑crisis literature. The study seeks to assess how well existing currency‑crisis theory explains the Thai baht’s devaluation and subsequent collapse by examining the sequence of events leading to the July 1997 devaluation. The authors analyze the Thai crisis by applying established currency‑crisis models to the country’s specific events, focusing solely on Thailand and excluding broader contagion dynamics.

Abstract

This paper provides a detailed study of the crisis in Thailand with the goal of determining the usefulness of existing currency crisis theory to the breakdown of the baht's de facto dollar peg in 1997-98. We do not attempt to provide a comprehensive survey of the currency crisis literature; nor do we add directly to the empirical and theoretical literatures on currency crises. Rather, our goal in this paper is to examine, through the lens of the existing currency crisis literature, the sequence of events culminating with the devaluation of the Thai baht in July 2, 1997 and the financial and economic collapse thereafter. But why do we concentrate on Thailand in particular? First, the devaluation of the baht is widely acknowledged as the dawn of the East Asian crisis. Second, and in relation to this, given that Thailand was the first domino to fall, there seems to be greater debate/disagreement as to whether the Thai crisis was 'fundamentals-based' or due to 'self-fulfilling expectations'. Given our emphasis on Thailand, we do not address the issue of the reasons for the widening and deepening of the crisis from Thailand to the rest of East Asia and beyond (i.e. 'contagion').