Speculative currency attacks: role of inconsistent macroeconomic policies and real exchange rate overvaluation

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Speculative currency attacks: role of inconsistent macroeconomic policies and real exchange rate overvaluation

Author Info

Alfredo Pistelli () (Banco Central de Chile)

Abstract

This paper provides a critical analysis of Kaminsky and Reinhart (1999) (KR), perhaps the most prominent empirical paper on causes of currency crises. After dealing with problems present in this paper, it proposes an aggregate leading indicator of crisis. The proposed indicator performs better than a composite index based on the best six individual indicators of KR, both in terms of accuracy and predictive capacity, and represents a unified version of the currency crises approach that emphasizes the role of inconsistent macroeconomic policies as an explanation of currency crises, and the approach that emphasizes the role of tradeoffs among policymakers decisions as the main cause of these crises. Variables included in the proposed leading indicator are: the deviation of the actual stock of internationall reserves from an estimated demand for international reserves; the real growth of domestic credit; the ratio of domestic credit to M2; and the behavior of both the real exchange rate and industrial production as a measure of overvaluation of the real exchange rate.

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Publisher Info
Article provided by Ilades-Georgetown University, Economics Department in its journal Revista de Analisis Economico.

Volume (Year): 22 (2007)
Issue (Month): 2 (December)
Pages: 3-27
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Handle: RePEc:ila:anaeco:v:22:y:2007:i:2:p:3-27

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

References listed on IDEAS
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Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Maurice Obstfeld, 1997. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April. [Downloadable!] (restricted)
Eduardo Borensztein & Catherine A. Pattillo & Andrew Berg, 2004. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Working Papers 04/52, International Monetary Fund. [Downloadable!]
Other versions:
- Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 52(3), pages 5. [Downloadable!] (restricted)
Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany. [Downloadable!]
Other versions:
- Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank. [Downloadable!]
- Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
- Graciela Kaminsky & Saul Lizondo & Carmen Reinhart, 1998. "Leading Indicators of Currency Crisis," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(1), pages 1. [Downloadable!] (restricted)
Graciela L. Kaminsky, 2003. "Varieties of Currency Crises," NBER Working Papers 10193, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June. [Downloadable!] (restricted)

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