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Fundamental Pitfalls of Exchange Market Pressure-Based Approaches to Identification of Currency Crises

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  • Victor Pontines

    ()
    (School of Economics, University of Adelaide)

  • Reza Siregar

    ()
    (School of Economics, University of Adelaide)

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 (1995), Sachs, Tornell and Velasco (1996), and Kaminsky, Lizondo and Reinhart (1998) 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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File URL: http://www.adelaide.edu.au/cies/papers/0602.pdf
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Bibliographic Info

Paper provided by University of Adelaide, Centre for International Economic Studies in its series Centre for International Economic Studies Working Papers with number 2006-02.

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Length: 43 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:adl:cieswp:2006-02

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Keywords: Currency Crisis; Exchange Market Pressure; Extreme Value Theory; East Asia; Latin America.;

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References

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  1. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
  2. Huisman, Ronald, et al, 2001. "Tail-Index Estimates in Small Samples," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 208-16, April.
  3. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
  4. Pozo, Susan & Amuedo-Dorantes, Catalina, 2003. "Statistical distributions and the identification of currency crises," Journal of International Money and Finance, Elsevier, vol. 22(4), pages 591-609, August.
  5. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  6. Michael Chui, 2002. "Leading indicators of balance-of-payments crises: a partial review," Bank of England working papers 171, Bank of England.
  7. Ramon Moreno, 1995. "Macroeconomic behavior during periods of speculative pressure or realignment: evidence from Pacific Basin economies," Pacific Basin Working Paper Series 95-05, Federal Reserve Bank of San Francisco.
  8. 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, vol. 12(2-3), pages 385-423.
  9. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  10. Andrew Berg & Eduardo Borensztein & Catherine A. Pattillo, 2004. "Assessing Early Warning Systems," IMF Working Papers 04/52, International Monetary Fund.
  11. 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.
  12. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  13. 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, number 100, July.
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Citations

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Cited by:
  1. Victor Pontines, 2013. "How Useful Is an Asian Currency Unit (ACU) Index for Surveillance in East Asia?," Finance Working Papers 23398, East Asian Bureau of Economic Research.
  2. 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, vol. 21(1), pages 130-139.
  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. Dreher, Axel & Walter, Stefanie, 2010. "Does the IMF Help or Hurt? The Effect of IMF Programs on the Likelihood and Outcome of Currency Crises," World Development, Elsevier, vol. 38(1), pages 1-18, January.
  5. 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.
  6. Reza Siregar & Ramkishen Rajan, 2006. "Models of Equilibrium Real Exchange Rates Revisited: A Selective Review of the Literature," Centre for International Economic Studies Working Papers 2006-04, University of Adelaide, Centre for International Economic Studies.
  7. 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.
  8. Mohammad Karimi & Marcel-Cristian Voia, 2011. "Identifying Extreme Values of Exchange Market Pressure," Carleton Economic Papers 11-10, Carleton University, Department of Economics.
  9. Kym Anderson & Will Martin & Dominique van der Mensbrugghe, 2007. "China, the WTO, and the Doha Agenda," Centre for International Economic Studies Working Papers 2007-02, University of Adelaide, Centre for International Economic Studies.
  10. 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.
  11. Müller-Plantenberg, Nikolas A., 2010. "Balance of payments accounting and exchange rate dynamics," International Review of Economics & Finance, Elsevier, vol. 19(1), pages 46-63, January.

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