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The Asian Financial Crisis and Malaysian Capital Controls

The Asian crisis that began in Thailand in the spring and summer of 1997 spread rapidly to other Asian emerging markets, including Malaysia (Baig and Goldfajn, November 1998). What began as a currency crisis turned into a full-fledged financial crisis, affecting particularly the exchange rate, banking sector, and stock and real estate markets in Malaysia. It also became an economic crisis engulfing the Malaysian real economic sector, as evidenced by declining growth in Gross Domestic Product (GDP), rising unemployment, and collapsing asset prices. Finally, it developed into a socio-political crisis involving riots against the ethnic Chinese in Malaysia and a rift between the Malaysian Prime Minister and the then Deputy Prime Minister. The responses of the Asian regulators to the crisis varied considerably, ranging from the use of conventional policy instruments like interest rates and exchange rates in Thailand and the Philippines to unconventional market intervention policies like capital and stock market controls in Malaysia and Hong Kong (Goldjajn and Baig, December 1998; Bhattacharya, November 1999). The purpose of this article is to evaluate the effectiveness of the market intervention policy instruments invoked by Malaysian regulatory authorities in coping with the crisis. The policy instruments discussed in this article are essentially capital and stock market controls.