The Effects of Capital Outflows from Neighboring Countries on a Home Country's Terms of Trade and Real Exchange Rate : The Case of East Asia

While there is an extensive body of empirical analyses showing that currency crises tend to be regionally concentrated to specific areas and contagious to countries with high levels of trade, there has been insufficient research on the mechanisms underlying such tendencies. Using a two country model, we investigate the possibility of deterioration in the terms of trade and a rise in the real exchange rate of a home country in the case of capital outflows from its trade partner. In addition, an empirical analysis of East Asian countries conclusively shows that some countries conform to the model.Generally, neighboring countries trade extensively with one another for reasons like low logistics costs. This paper finds that such patterns of trade can be one reason for a currency crisis being regional