Sudden stop and trade balance reversal after Asian crisis: Investment drought impact versus exchange rate depreciation

After the Asian crisis in 1997, the respective trade balances of Indonesia, Korea, Malaysia, and Thailand reversed suddenly from deficit to surplus. By particularly addressing the sudden cessation of investment caused by the financial crisis, it is demonstrated that the IS balance adjustment dominates real exchange rate depreciation, indicating that to reform the large external imbalance of Asian countries, which is a major component of global imbalance, policymakers should target domestic absorption. Furthermore, it can be demonstrated that the large trade balance surplus of Asian countries will decrease along with recovery. Finally, policy implications related to the recent Euro crisis are provided.