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Evaluating currency crises: the case of the European monetary system

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  • Andrea Cipollini
  • Kostas Mouratidis
  • Nicola Spagnolo

    ()

Abstract

In this paper we examine the nature of currency crises. We ascertain whether the currency crises of the European Monetary System (EMS) were based either on fundamentals, or on self-fulfilling market expectations driven by extrinsic uncertainty. In particular, we extend previous work of Jeanne and Masson (J Int Econ 50:327–350, 2000) regarding the evaluation of currency crisis. We contribute to the existing literature proposing the use of Markov regime-switching with time-varying transition probability model. Our empirical results suggest that the currency crises of the EMS were not due only to market expectations driven by external uncertainty, or ‘sunspots’, but also to fundamental variables that help to explain the behavior of market expectations. Copyright Springer-Verlag 2008

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 35 (2008)
Issue (Month): 1 (August)
Pages: 11-27

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Handle: RePEc:spr:empeco:v:35:y:2008:i:1:p:11-27

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Related research

Keywords: Currency crises; Multiple equilibria; Markov-switching; C22; D84; F31;

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References

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Cited by:
  1. Ourania Dimakou, 2010. "Central Bank Independence, Bureaucratic Corruption and Fiscal Responses - Empirical Evidence," Birkbeck Working Papers in Economics and Finance 1012, Birkbeck, Department of Economics, Mathematics & Statistics.
  2. Lopes, José Mário & Nunes, Luis C., 2012. "A Markov regime switching model of crises and contagion: The case of the Iberian countries in the EMS," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1141-1153.

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