© Blackwell Publishing Ltd/University of Adelaide and Flinders University of South Australia 2004. CURRENCY MARKET CONTAGION IN THE ASIA-PACIFIC REGION # MARDI DUNGEY The Australian National University RENÉE FRY The Australian National University VANCE L. MARTIN The University of Melbourne During the East Asian currency crisis of 1997–98 the potential transmission of the crisis to developed markets such as Japan, Australia and New Zealand, was of considerable policy concern. Potential channels consist of anticipated movements stemming from common factors, spillovers and contagion. The empirical results show that the transmission of volatility in the East-Asian currency markets to the developed markets in the region is not due to contagion, but rather attributed to common world factors. Spillovers have a minor role in the case of Japan and to a lesser degree, Australia. I. Introduction The East Asian currency crisis has been widely characterised as beginning with the float and depreciation of the Thai baht on 2nd July, 1997. This was followed by depreciations of the Malaysian ringitt, and the Indonesian rupiah which was floated on the 14th August, 1997. The transmission of pressure between these export-competing economies is interpreted by Goldstein (1998) as a ‘competitive devaluation’, as the fall in the Thai baht created pressure on the Malaysian and Indonesian currencies. Even though this channel of pressure did not apply to the Korean won (see Krugman (1998)), the won nevertheless came under increasing pressure over 1997, and eventually floated on December 22, 1997. Kaminsky and Schmulker (1999) provide a chronology of the events over the East Asian crisis period. The size of these depreciations and the subsequent increases in volatility are highlighted in Figure 1. The standard deviations of currency returns reported in Table I reveal that volatility increased by around 1000% for Korea, Thailand and Malaysia, and over 5000% for Indonesia. Figure 1 also reveals that the increase in volatility over the crisis period was not limited to the East-Asian countries, but was also experienced by other countries on the periphery of the region, such as Japan, Australia and New Zealand. The standard deviations reported in Table I show that volatility approximately doubled in the case of Australia and New Zealand, whilst Correspondence: Renée Fry, Division of Economics, Research School of Pacific and Asian Studies, Coombs Building, the Australian National University, Canberra, ACT 0200. Email: Renee.Fry@anu.edu.au, telephone: +61 2 6125 3387, fax: +61 2 6125 3700. # We would like to thank an anonymous referee and Stan Hurn for useful comments, and Leslie Hull for providing us with background on New Zealand. This project was funded under ARC large grant A00001350.