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Safety from Currency Crashes

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  • Kent Osband

    (International Monetary Fund)

  • Caroline Van Rijckeghem

    (International Monetary Fund)

Abstract

As part of a proposed two-stage early warning system, we estimate "safety zones" for fundamentals under which currency crashes are unlikely to occur. We depart from traditional regression-based early warning systems and instead estimate the set of fundamentals for which currency crises never occurred and label this environment "safe or near-safe." For a sample of emerging markets from 1985 through 1998, we are able to classify 47 percent of the observed tranquil environments as safe or near-safe on a 12-month horizon, based on criteria in which external debt and reserves feature heavily. Nonparametric tests indicate that environments we identified as safe or near-safe bear less than a 1 percent risk of a currency crash. The results also pass a number of out-of-sample tests. Copyright 2000, International Monetary Fund

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 47 (2000)
Issue (Month): 2 ()
Pages: 4

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Handle: RePEc:pal:imfstp:v:47:y:2000:i:2:p:4

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References

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  1. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers, International Monetary Fund 97/79, International Monetary Fund.
  2. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 351-366, November.
  3. Guillermo A. Calvo & Enrique G. Mendoza, 1996. "Mexico's balance-of-payments crisis: a chronicle of death foretold," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 545, Board of Governors of the Federal Reserve System (U.S.).
  4. Robert Flood & Nancy Marion, 1998. "Perspectives on the Recent Currency Crisis Literature," NBER Working Papers 6380, National Bureau of Economic Research, Inc.
  5. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  6. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 309-330, November.
  7. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers, International Monetary Fund 99/88, International Monetary Fund.
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Cited by:
  1. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
  2. Caroline Rijckeghem & Beatrice Weder, 2009. "Political institutions and debt crises," Public Choice, Springer, Springer, vol. 138(3), pages 387-408, March.
  3. Richard Hemming & Axel Schimmelpfennig & Michael Kell, 2003. "Fiscal Vulnerability and Financial Crises in Emerging Market Economies," IMF Occasional Papers, International Monetary Fund 218, International Monetary Fund.
  4. Frankel, Jeffrey & Saravelos, George, 2011. "Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp11-024, Harvard University, John F. Kennedy School of Government.
  5. Andrew Berg & Rebecca N. Coke, 2004. "Autocorrelation-Corrected Standard Errors in Panel Probits," IMF Working Papers, International Monetary Fund 04/39, International Monetary Fund.
  6. Gagnon, Joseph E., 2009. "Currency crashes and bond yields in industrial countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(1), pages 161-181, February.
  7. Van Rijckeghem, Caroline & Weder di Mauro, Beatrice, 2004. "The Politics Of Debt Crises," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4683, C.E.P.R. Discussion Papers.
  8. Theo S. Eicher & Charis Christofides & Chris Papageorgiou, 2012. "Did Established Early Warning Signals Predict the 2008 Crises?," Working Papers, University of Washington, Department of Economics UWEC-2012-05, University of Washington, Department of Economics.
  9. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
  10. Magazzino, Cosimo & Forte, Francesco, 2010. "Optimal size of government and economic growth in EU-27," MPRA Paper 26669, University Library of Munich, Germany.

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