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Fundamental pitfalls of exchange market pressure-based approaches to identification of currency crises

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  • Pontines, Victor
  • Siregar, Reza

Abstract

This study seeks to demonstrate that the identification of crisis episodes based on commonly applied exchange market pressure (EMP) indices, namely, Eichengreen, Rose and Wyplosz [Eichengreen, B., Rose, A., and Wyplosz, C., 1995, Exchange Market Mayhem: The Antecedents and Aftermaths of Speculative Attacks, Economic Policy 21 (October), 249-312.], Sachs, Tornell and Velasco [Sachs, J.D., Tornel, A., and Velasco, A., 1996, Financial Crises in Emerging Markets: The Lessons From 1995, Brooking Papers on Economic Activity 1, 147-215.], and Kaminsky, Lizondo and Reinhart [Kaminsky, G., Lizondo, S., and Reinhart, C., 1998, Leading Indicators of Currency Crises, IMF Staff Paper 45, 1 (March), 1-48.] are highly sensitive to the choice of: a) the weighting scheme for each component of the EMP index; and b) the statistical parametric assumption used in the constructions of crisis thresholds. To highlight further some of the potential consequences of these two pitfalls in identifying crisis episodes, this paper employs a number of possible alternative approaches to measure the exchange market pressure.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 17 (2008)
Issue (Month): 3 ()
Pages: 345-365

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Handle: RePEc:eee:reveco:v:17:y:2008:i:3:p:345-365

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Web page: http://www.elsevier.com/locate/inca/620165

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  1. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  3. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
  4. Morris Goldstein & Carmen M. Reinhart, 2000. "Assessing Financial Vulnerability: An Early Warning System for Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 100, July.
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  6. Andrew Berg & Eduardo Borensztein & Catherine A. Pattillo, 2004. "Assessing Early Warning Systems," IMF Working Papers 04/52, International Monetary Fund.
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  8. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  9. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Harvard Institute of Economic Research Working Papers 1759, Harvard - Institute of Economic Research.
  10. Huisman, Ronald, et al, 2001. "Tail-Index Estimates in Small Samples," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 19(2), pages 208-16, April.
  11. Ramon Moreno, 1995. "Macroeconomic behavior during periods of speculative pressure or realignment: evidence from Pacific Basin economies," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
  12. 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, Elsevier, vol. 12(2-3), pages 385-423.
  13. Pozo, Susan & Amuedo-Dorantes, Catalina, 2003. "Statistical distributions and the identification of currency crises," Journal of International Money and Finance, Elsevier, Elsevier, vol. 22(4), pages 591-609, August.
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Cited by:
  1. Mohammad Karimi & Marcel-Cristian Voia, 2011. "Identifying Extreme Values of Exchange Market Pressure," Carleton Economic Papers 11-10, Carleton University, Department of Economics.
  2. Hall, Stephen G. & Kenjegaliev, Amangeldi & Swamy, P.A.V.B. & Tavlas, George S., 2013. "Measuring currency pressures: The cases of the Japanese yen, the Chinese yuan, and the UK pound," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 1-20.
  3. Scott W Hegerty, 2013. "Exchange Market Pressure, Output Drops, and Domestic Credit: Do Emerging Markets Behave Differently?," Economics Bulletin, AccessEcon, vol. 33(4), pages 2583-2595.
  4. Pontines, Victor, 2013. "How Useful Is an Asian Currency Unit (ACU) Index for Surveillance in East Asia?," ADBI Working Papers 413, Asian Development Bank Institute.
  5. Axel Dreher & Stefanie Walter, 2008. "Does the IMF Help or Hurt? The Effect of IMF programs on the likelihood and outcome of currency crises," KOF Working papers 08-186, KOF Swiss Economic Institute, ETH Zurich.
  6. Kym Anderson & Will Martin & Dominique van der Mensbrugghe, 2007. "China, the WTO, and the Doha Agenda," Centre for International Economic Studies Working Papers, University of Adelaide, Centre for International Economic Studies 2007-02, University of Adelaide, Centre for International Economic Studies.
  7. Ramkishen S. Rajan & Reza Y. Siregar, 2007. "Models of Equilibrium Real Exchange Rates Revisited: A Selective Review of the Literature," Working Papers id:1198, eSocialSciences.
  8. Victor Pontines & Reza Siregar, 2012. "Episodes of Large Exchange Rate Appreciations and Reserves Accumulations in Selected Asian Economies: Is Fear of Appreciation Justified?," CAMA Working Papers 2012-31, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  9. Müller-Plantenberg, Nikolas A., 2010. "Balance of payments accounting and exchange rate dynamics," International Review of Economics & Finance, Elsevier, Elsevier, vol. 19(1), pages 46-63, January.
  10. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
  11. Hsiao, Yu-Ming & Pan, Sheng-Chieh & Wu, Po-Chin, 2012. "Does the central bank's intervention benefit trade balance? Empirical evidence from China," International Review of Economics & Finance, Elsevier, Elsevier, vol. 21(1), pages 130-139.

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