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Asian Currency Crises: Do Fundamentals still Matter? A Markov-Switching Approach to Causes and Timing

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Author Info
J L Ford
Bagus Santoso
N J Horsewood
Abstract

This paper examines the extent to which the Asian currency crises can be accounted for by the macroeconomic fundamentals suggested by first and second generation models, exclusive of the ideas of the third generation models. In doing so we extend the literature on the earlier models by using GARCH and Path Independent Markov-Switching GARCH models to explain the market pressure on the exchange rate, and the probability of the timing of a crisis. In addition, we account for appreciations of the exchange rate. Our empirical estimates for Indonesia, South Korea, Malaysia and Thailand confirm that macroeconomic variables can explain the crises and the probability of occurrence at any time, dominating the conventionally used logit model.

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Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 07-07.

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Length: 50 pages
Date of creation: Jul 2007
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Handle: RePEc:bir:birmec:07-07

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Related research
Keywords: Currency crisis; macroeconomic fundamentals; Markov-switching; volatile sate; stable state; probability of a crisis; logit model;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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