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Chronicle of currency collapses: Re examining the effects on output

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  • Bussière, Matthieu
  • Saxena, Sweta C.
  • Tovar, Camilo E.

Abstract

The impact of currency collapses (i.e. large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies over the period 1960–2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialize before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (i.e. ceteris paribus), we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction, and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, i.e. one-time events induce exchange rate and output dynamics that differ from consecutive episodes.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 31 (2012)
Issue (Month): 4 ()
Pages: 680-708

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:4:p:680-708

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Currency crisis; Exchange rates; Real output growth; Recovery from crises;

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References

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  1. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," CEPR Discussion Papers 1921, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Lang, Michael, 2013. "The early warnings of balance-of-payments problems: Kaminsky and Reinhart revisited," Frankfurt School - Working Paper Series 205, Frankfurt School of Finance and Management.
  2. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2011. "The macroeconomic effects of large exchange rate appreciations," ZEW Discussion Papers 11-016, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Giuseppe Bertola & John Driffill & Harold James & Hans-Werner Sinn & Jan-Egbert Sturm & Ákos Valentinyi, 2013. "Chapter 2: European Imbalances," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 55-72, 02.
  4. Bussirère, Matthieu & Lopez, Claude & Tille, Cédric, 2013. "Currency Crises in Reverse: Do Large Real Exchange Rate Appreciations Matter for Growth?," MPRA Paper 44053, University Library of Munich, Germany.
  5. Cumperayot, Phornchanok & Kouwenberg, Roy, 2013. "Early warning systems for currency crises: A multivariate extreme value approach," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 151-171.
  6. Brei, Michael & Charpe, Matthieu, 2012. "Currency depreciations, financial transfers, and firm heterogeneity," Emerging Markets Review, Elsevier, vol. 13(1), pages 26-41.
  7. Mohammad Karimi & Marcel-Cristian Voia, 2011. "Empirics of Currency Crises: A Duration Analysis Approach," Carleton Economic Papers 11-11, Carleton University, Department of Economics.
  8. Camilo E Tovar, 2010. "Currency collapses and output dynamics: a long-run perspective," BIS Quarterly Review, Bank for International Settlements, June.
  9. Steiner, Andreas, 2013. "How central banks prepare for financial crises – An empirical analysis of the effects of crises and globalisation on international reserves," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 208-234.

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