Pro-Cyclicality of Consumer Spending and the Financial Crisis of Thailand

The 1997/98 financial crisis of Thailand has been extensively analyzed and yet, important questions remain to be answered regarding consumer behavior and its implications in regard to the crisis. This paper attempts to analyze the movements of consumer spending in Thailand during the period from 1975 to 1998, in order to shed some light on the causes of the 1997/98 financial crisis of Thailand. A hypothesis of the pro-cyclicality of consumer spending is developed by modifying Mankiw's liquidity constrained hypothesis; it is then tested by using data from various issues of International Financial Statistics and the Bank of Thailand's homepage. Results indicate that consumer spending in Thailand was pro-cyclical during the period from 1990 to 1998 and that this factor partly contributed to the boom-bust of Thailand's economy. The findings of this study suggest that taxation or credit restrictions targeted at luxury consumption may need to be taken in foreign credit-induced booms.1