with a consumption boom made the export sector very uncompetitive through cost increases, and the exchange rate could not adjust. Furthermore, domestic ...nancial intermediaries increased their exposure to foreign lending which arose from favorable interest rates abroad so this posed future asset and liability problems to them.<sup>5</sup> From another perspective, Kasajima and Lewis (2001) reason that the Thai nominal exchange rate has been overvalued to the real e¤ective exchange rate, the latter which observed a real depreciation for most of the early 1990s. In general, Thailand’s current account de...cit reached a historic high level in the second quarter of 1996. Note that we do not explicitly attempt to explain the causes for the Thai currency and ...nancial crisis.<sup>6</sup> Based on the negative external shocks, the Bank of Thailand decided to devalue the baht in July 1997 which drastically increased the exposure of Thai companies to debt denominated in foreign currencies. In that August, the Thai central bank ordered over 40 ...nancial companies to suspend their operation. Rating agencies such as S&P reduced its sovereign risk rating for Thailand to BBB, the minimum investment grade, in September. By November the same year, both the ...nance and prime minister had resigned from their post. Alongside the turmoil on the domestic ...nancial markets the authorities further deregulated the ...nancial sector by allowing investors to increase their share ownership of existing ...nancial institutions (November, 1997) and by dismantling currency controls (January, 1998). By the beginning of 1998, the rating of various ...nancial institutions reached junk status, and interest rates soared to historical high levels. In 2006, Thailand still faces problems in terms of non-performing loans in a weakly functioning banking system as well as high government debt levels.

The dataset consists of monthly observations from January 1989 up to December 2004. All variables except the US price level are not seasonally adjusted. The following variables are mainly used in the analysis:

|Variable<br>Details|Source|
|---|---|
|RM1<br>Log real money M1 =LM1�LCPI|IFS|
|LMPI<br>Log manufacturing production index|IFS|
|LCPI<br>Log Consumer Price Index (Thailand)|IFS|
|RP<br>Repurchase rate, 14 days /1200|IFS|
|LEXCH<br>Log nominal exchange rate (Baht/US Dollar)|IFS|
|LCPIU<br>Log Consumer Price Index (USA)|LOU|
|PPP<br>Log PPP relation =LCPI�LCPIU �LEXCH|Own Calculations|
|LLENDING<br>Log bank Lending|IFS|
|Source: IMF International Financial Statistics (IFS), Labour O¢ ce|in the USA (LOU)|
|Notes: <sup>0</sup>L<sup>0</sup> �log, ’D’��||
|Table 1: Overview of Variables||

> 5 Similarly, according to Warr and Vines (2003), Thailand’s investment boom and bust mainly contributed to the increased vulnerability of the economy.

> 6 There is a huge literature on modelling the Asian currency and ...nancial crisis. See Krugman (1999), Masson (1999), Agenor et al (1999), Irwin and Vines (2003) amongst others. Krugman (1999) attempts to explain the Asian crisis from deteriorating ...rms’balance sheets and moral harzard problems whereas Masson (1999) postulates a story in which contagion was the predominant factor. In contrast, Irwin and Vines (2003) combine various strands of the so-called ’third generation models’into a coherent framework that involves investment collapse, moral hazard problems, and multiple equilibria. Finally, Agenor at al (1999) provide a full conceptual, empirical and theoretical account of the crisis.

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