Currency mismatches in particular – the fact that the assets of households, firms, and banks were largely denominated in the domestic currency while many liabilities were in foreign currencies – proved a constraint on monetary policy.
Central bankers understood that any reduction in the policy rate would likely weaken the currency, which in turn would raise the value of domestic borrowers’ liabilities relative to their assets, with negative consequences for the solvency of both the nonfinancial corporate sector and the banking system. However, in the years following the Asian crisis, currency and maturity mismatches were reduced substantially.