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Fundamentals, Contagion and Currency Crises: An Empirical Analysis

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Author Info
Kruger, Mark
Osakwe, Patrick N.
Page, Jennifer

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Abstract

This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fundamentals? Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a measure of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion effects as well as the speculative behaviour of investors may be important determinants.

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Paper provided by Bank of Canada in its series Working Papers with number 98-10.

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Length: 36pages
Date of creation: 1998
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Handle: RePEc:bca:bocawp:98-10

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Related research
Keywords: Exchange rates;

Find related papers by JEL classification:
F3 - International Economics - - International Finance

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. 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.). [Downloadable!]
    Other versions:
  3. Gerlach, Stefan & Smets, Frank, 1994. "Contagious Speculative Attacks," CEPR Discussion Papers 1055, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. 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:
  5. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank. [Downloadable!]
    Other versions:
  6. 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. [Downloadable!] (restricted)
    Other versions:
  7. William R. Melick, 1996. "Estimation of speculative attack models: Mexico yet again," BIS Working Papers 36, Bank for International Settlements. [Downloadable!]
  8. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1995. "Speculative attacks on pegged exchange rates: an empirical exploration with special reference to the European Monetary System," Working Papers in Applied Economic Theory 95-04, Federal Reserve Bank of San Francisco.
    Other versions:
  9. 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. [Downloadable!]
    Other versions:
  10. Blackburn, Keith & Sola, Martin, 1993. " Speculative Currency Attacks and Balance of Payments Crises," Journal of Economic Surveys, Blackwell Publishing, vol. 7(2), pages 119-44, June.
  11. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February. [Downloadable!] (restricted)
  12. Pierre-Richard Agenor & Jagdeep S. Bhandari & Robert P. Flood, 1991. "Speculative Attacks and Models of Balance-of-Payments Crises," NBER Working Papers 3919, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. F. Gulcin Ozkan & Alan Sutherland, . "A Model of the ERM Crisis," EPRU Working Paper Series 93-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    Other versions:
  15. Richard A. Meese & Andrew K. Rose, 1996. "Exchange rate instability: determinants and predictability," Proceedings, Federal Reserve Bank of San Francisco, pages 183-205.
    Other versions:
  16. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jeannine Bailliu & Robert Lafrance & Jean-François Perrault, 2002. "Does Exchange Rate Policy Matter for Growth?," Working Papers 02-17, Bank of Canada. [Downloadable!]
    Other versions:
  2. Ramkishen Rajan & Rahul Sen & Reza Y. Siregar, 2002. "Hong Kong, Singapore and the East Asian Crisis: How Important were Trade Spillovers?," Working Papers 142002, Hong Kong Institute for Monetary Research. [Downloadable!]
    Other versions:
  3. Cruz Rodriguez, Alexis, 2008. "Presion y ataques especulativos en el mercado cambiario de la Republica Dominicana
    [Pressure and speculative attacks on the foreign exchange market of the Dominican Republic]    ," MPRA Paper 15172, University Library of Munich, Germany. [Downloadable!]
  4. Patrick A. Imam & Camelia Minoiu, 2008. "Mauritius: A Competitiveness Assessment," IMF Working Papers 08/212, International Monetary Fund. [Downloadable!]
  5. Muhd-Zulkhibri Abdul Majid, 2004. "Sources Of Asian Currency Crisis," International Finance 0405020, EconWPA. [Downloadable!]
  6. Ramkishen S. Rajan & Chung-Hua Shen, 2002. "Are crisis-induced devaluations contractionary?," Pacific Basin Working Paper Series 02-06, Federal Reserve Bank of San Francisco. [Downloadable!]
  7. Massacci, D., 2007. "Identification and Estimation in an Incoherent Model of Contagion," Cambridge Working Papers in Economics 0744, Faculty of Economics, University of Cambridge. [Downloadable!]
  8. I.Igal Magendzo, 2002. "Are Devaluations Really Contractionary?," Working Papers Central Bank of Chile 182, Central Bank of Chile. [Downloadable!]
  9. Mardi Dungey & Renee Fry & Vance Martin & Brenda González-Hermosillo, 2004. "Characterizing Global Investors' Risk Appetite for Emerging Market Debt During Financial Crises," IMF Working Papers 03/251, International Monetary Fund. [Downloadable!]
  10. Eric Santor, 2003. "Banking Crises and Contagion: Empirical Evidence," Working Papers 03-1, Bank of Canada. [Downloadable!]
  11. Lafrance, Robert & Osakwe, Patrick & St-Amant, Pierre, 1998. "Evaluating Alternative Measures of the Real Effective Exchange Rate," Working Papers 98-20, Bank of Canada. [Downloadable!]
  12. Mardi Dungey & Renee Fry & Vance Martin & Brenda González-Hermosillo, 2002. "International Contagion Effects from the Russian Crisis and the LTCM Near-Collapse," IMF Working Papers 02/74, International Monetary Fund. [Downloadable!]
  13. Federico Marongiu, 2005. "Towards A New Set Of Leading Indicators Of Currency Crisis For Developing Countries: An Application To Argentina," Public Economics 0512011, EconWPA. [Downloadable!]
  14. M. Isabel Campos & M. Araceli Rodríguez, . "Crises and Credibility in a Target Zone: A Logit From a Markov-Switching Model," Working Papers on International Economics and Finance 00-05, FEDEA. [Downloadable!]
  15. Bengi Kibritcioglu & Bulent Kose & Gamze Ugur, 2001. "A Leading Indicators Approach to the Predictability of Currency," International Finance 0108001, EconWPA, revised 06 Sep 2001. [Downloadable!]
  16. Steven B. Kamin & John W. Schindler & Shawna L. Samuel, 2001. "The contribution of domestic and external factors to emerging market devaluation crises: an early warning systems approach," International Finance Discussion Papers 711, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  17. Pablo Bustelo & Clara Garcia & Iliana Olivie, 1999. "Global and Domestic Factors of Financial Crises in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)," Working Papers 002, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales. [Downloadable!]
  18. Claudio Soto & Alberto Naudon & Eduardo López & Alvaro Aguirre, 2004. "Acerca del Nivel Adecuado de las Reservas Internacionales," Working Papers Central Bank of Chile 267, Central Bank of Chile. [Downloadable!]
  19. Andreas Pick, 2007. "Financial contagion and tests using instrumental variables," DNB Working Papers 139, Netherlands Central Bank, Research Department. [Downloadable!]
  20. Pablo García & Claudio Soto, 2004. "Large Hoardings of International Reserves: Are They Worth It?," Working Papers Central Bank of Chile 299, Central Bank of Chile. [Downloadable!]
  21. Burkart, O. & Coudert, V., 2000. "Leading Indicators of Currency Crises in Emerging Economies," Documents de Travail 74, Banque de France. [Downloadable!]
  22. J L Ford & Bagus Santoso & N J Horsewood, 2007. "Asian Currency Crises: Do Fundamentals still Matter? A Markov-Switching Approach to Causes and Timing," Discussion Papers 07-07, Department of Economics, University of Birmingham. [Downloadable!]
  23. Kam-hon CHU & Bob Y. C. Chan & Chor-yiu Sin, 2000. "Contagion Effects, Informational Effects, and Economic Fundamentals: An Analysis of Exchange Rate Dynamics during the Asian Currency Crisis," Working Papers 022000, Hong Kong Institute for Monetary Research. [Downloadable!]
  24. Axel Brüggemann & Thomas Linne, . "How Good are Leading Indicators for Currency and Banking Crises in Central and Eastern Europe? An Empirical Test," IWH Discussion Papers 95, Halle Institute for Economic Research. [Downloadable!]
  25. Mark Illing & Ying Liu, 2003. "An Index of Financial Stress for Canada," Working Papers 03-14, Bank of Canada. [Downloadable!]
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