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Currency crisis: Evolution of beliefs and policy experiments

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  • Arifovic, Jasmina
  • Maschek, Michael K.

Abstract

We study a model of currency crisis where agents’ beliefs are the only source of volatility containing the potential for currency devaluation. Using the basic framework of Arifovic and Masson (2003), we simulate the model for a large number of parameter specifications. The learning dynamics of our agent-based computational model, based on imitation of successful expectational rules and occasional experimentation, result in recurrent currency crises. Recurrent crises are a robust feature of the dynamics regardless of the model's parameter specifications. We discuss both the impact of imitation and experimentation on the model's dynamics, as well as the impact of the parameter values on the duration of episodes of devaluation and periods of no-devaluation. In addition, we compare the first difference in interest rate spread statistics of the data generated in our simulations and real world data. Finally, we conduct policy experiments in our agent-based type environment designed to examine the power of the interest rate policy changes in decreasing the number as well as the duration of the episodes of currency crisis. Our results indicate that the policy of decreasing, rather than increasing, the emerging market interest rate proves more effective at reducing the likelihood of devaluation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 82 (2012)
Issue (Month): 1 ()
Pages: 131-150

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Handle: RePEc:eee:jeborg:v:82:y:2012:i:1:p:131-150

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Currency crisis; Evolution of beliefs; Policy implications;

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  1. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 343, Bank of Italy, Economic Research and International Relations Area.
  2. LeBaron, Blake & Arthur, W. Brian & Palmer, Richard, 1999. "Time series properties of an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(9-10), pages 1487-1516, September.
  3. Lux, Thomas & Schornstein, Sascha, 2002. "Genetic learning as an explanation of stylized facts of foreign exchange markets," Discussion Paper Series 1: Economic Studies 2002,29, Deutsche Bundesbank, Research Centre.
  4. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  5. Jeanne, Olivier & Masson, Paul R, 1998. "Currency Crises, Sunspots and Markov-Switching Regimes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1990, C.E.P.R. Discussion Papers.
  6. Arifovic, Jasmina, 1996. "The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(3), pages 510-41, June.
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