Prop 13 Essay Example

Prop 13 Essay Example

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The Purchasing Power Parity Theorem and the collapse of the Thai baht: The Purchasing Power Parity theory is that exchange rates should tend to equalize relative price levels in different countries so that the real exchange rate remains constant over time. As per this theory, the devaluation of the baht was a logical fallout of the Thai economy shifting from export-heavy to import-heavy. However, the Thai case was influenced by several factors beyond the logic of the purchasing power parity theorem: depletion of foreign exchange reserves by the government purchasing its own currency in an effort to prop up the exchange rate; raising of interest rates to make holding the baht more attractive; a high debt-equity ratio among Thai corporates which was further aggravated with the devaluation of the baht; and the degree of non-performing assets with financial institutions.

Role of Speculators in the Baht Crisis: Though speculators did play a role in the run on the baht, it was more a consequence of the economic bubble formed by unrealistic expectations that the Thai economy would continue to sustain high growth rates; that the exchange rate would continue to be protected; that debt could be increased …

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