Currency Crises and Uncertainty About Fundamentals

IMF Working Papers, 2010

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Journal of International Money and Finance, 1999

In recent years, a number of researchers have claimed success in systematically predicting which countries are more likely to suffer currency crises, most notably Kaminsky, . This paper evaluates the KLR approach to anticipating currency crises and develops and tests an alternative. First, we try to answer the question: if we had been using the KLR model in late 1996, how well armed would we have been to predict the Asia crisis? Second, we analyze a more general probit-based model of predicting currency crises. In the process, we test several basic assumptions underlying the indicators approach.

Emerging Markets Finance and Trade, 2010

This paper examines the probability of currency crises using a signal approach and a multivariate probit model. The results indicate that the signal approach can provide an effective warning system despite its nonparametric nature. The top three indicators that are useful in anticipating crises include international reserves, stock market indices, and GDP, respectively. Excess money balances and the ratio of domestic credit to GDP are significant and have positive correlation with the probability of a crisis. The growth rate of exports and the stock indices are significant and have a negative relationship with a crisis probability. Overall, the results indicate that government policies, the macroeconomic environment, and investor panic/self-fulfilling expectations all play a role in the making of a crisis.

In recent years, the frequency of currency crises in developing countries seems to have increased. Moreover, the consequences of these financial crises have probably worsened, not only for the country concerned, but also for other countries in the region, due to increased international trade and capital flows. This has encouraged research on the prediction of currency crises. In this paper, this research is summarised and a new approach to modelling currency crises is proposed.

CEPAL Review

SSRN Electronic Journal, 2000

During the 2007-2009 financial crisis the foreign exchange market was characterized by large volatility and wide currency swings. In this paper we evaluate whether during the period of the Great Recession there has been a structural break in the relationship between fundamentals and exchange rates within an early-warning framework. This is done by extending the original data set by and including not only the most recent period, but also 17 new countries. Our analysis considers two variations of the original early-warning system. First, we propose two new methods to obtain the probability distribution of the early-warning indicator (conditional on the occurrence of a crisis) -one fully parametric and one based on a novel distribution-free semi-parametric approach. Second, we compare the original early-warning indicator with a core indicator that includes only "pseudo-financial variables" (domestic credit/GDP, the real exchange rate, international reserves and the real interest-rate differential) and we evaluate their performance not only for currency crises during the Great Recession, but also for the Asian Crisis. All tests make us conclude that "this time is different", i.e. early-warning systems based on traditional macroeconomic variables have not only failed to forecast currency crises during the Great Recession, but have also significantly worsened with respect to the period of the Asian crisis.

Economics Letters, 1987

We show that balance-of-payments crises are accompanied by discrete shifts in the exchange rate if in the pre-crisis situation the exchange rate is constrained by set limits and there is uncertainty about monetary policy reactions.

Open Economies Review, 1996

8y using data from the Mexican economy, this paper estimates a speculative attack model of currency crises in order to identify the role of macroeconomic fundamentals and early warning signals of a potential currency crisis. A deterioration in fundamentals appears to generate high onestep-ahead probabilities for the observed regime changes during the sample period 1982-1994. Particularly, foreign reserve losses, expansionary output, monetary and fiscal policies, an increase in inflation differentials and the share of short-term foreign currency-indexed debt, and an appreciation of the real exchange rate appear to have contributed to the speculative pressures and the associated regime changes.

1994

ABSTRACT This paper presents an empirical analysis of speculative attacks on pegged exchange rates in 22 countries between 1967 and 1992. We define speculative attacks or crises as large movements in exchange rates, interest rates, and international reserves. We develop stylized facts concerning the univariate behavior of a variety of macroeconomic variables, comparing crises with periods of tranquility.

2011

A currency crisis is a speculative attack on the foreign exchange value of a currency, resulting in a sharp depreciation or forcing the authorities to sell foreign exchange reserves and raise domestic interest rates to defend the currency. This article discusses analytical models of the causes of currency and associated crises, presents basic measures of the incidence of crises, evaluates the accuracy of empirical models in predicting crises, and reviews work measuring the consequences of crises on the real economy. Currency crises have large measurable costs on the economy, but our ability to predict the timing and magnitude of crises is limited by our theoretical understanding of the complex interactions between macroeconomic fundamentals, investor expectations and government policy.

Journal of International Money and Finance, 2006

The plethora of currency crises around the world has fueled many theories on the causes of speculative attacks. The first-generation models focus on fiscal problems while the second-generation models emphasize countercyclical policies and self-fulfilling crises. In the 1990s, models pinpoint to financial excesses. With the crisis of Argentina in 2001, models of sovereign default have become popular again. While the theoretical literature has emphasized variety, the empirical literature has supported the ''one size fits all'' models. This paper contributes to the empirical literature by assessing whether the crises of the last 30 years are of different varieties.

1997

This is a Working Paper and the author(s) would welcome any comments on the present text. Citations should refer 10a Working Paper o/the International Monetary Fund. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.

Journal of Risk and Financial Management, 2022

In this study we develop an early warning system (EWS) to forecast currency crises in emerging countries in Asia and Latin America, using logit regression on monthly data from 1992 to 2011. We found that macroeconomic and institutional variables are valuable indicators for forecasting crises. Our results show that a low level of export growth, current account surplus/GDP, GDP growth, a high level of real exchange rate growth, import growth, and short-term debt/reserves can explain the advent of a possible currency crisis. We found that a poor law and order scenario and high external conflict can lead to a currency crisis. Additional findings include high government stability and the absence of internal conflict, which contribute to an absence of democracy, ultimately leading to a currency crisis. The policy-makers can consider taking the effective pre-emptive actions to prevent the currency crises occurring in the future.

SSRN Electronic Journal, 2002