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Currency crises, sunspots and Markov-switching regimes

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  • Jeanne, Olivier
  • Masson, Paul

Abstract

This paper investigates the theoretical properties of a class of 'second generation' models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotic dynamics for the devaluation expectations. We then propose an econometric technique, based on the Markov-switching regimes framework, by which these models can be brought to the data. We illustrate this empirical approach by studying the experience of the French franc between 1987 and 1993, and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 50 (2000)
Issue (Month): 2 (April)
Pages: 327-350

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Handle: RePEc:eee:inecon:v:50:y:2000:i:2:p:327-350

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Web page: http://www.elsevier.com/locate/inca/505552

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  1. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
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  12. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
  13. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
  14. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
  15. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  16. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  17. Masson, Paul R, 1995. "Gaining and Losing ERM Credibility: The Case of the United Kingdom," Economic Journal, Royal Economic Society, vol. 105(430), pages 571-82, May.
  18. Velasco, Andres, 1996. "Fixed exchange rates: Credibility, flexibility and multiplicity," European Economic Review, Elsevier, vol. 40(3-5), pages 1023-1035, April.
  19. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
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