This paper investigates the role of external balance sheet variables as determinants of currency crises in emerging market (EME) and advanced economies. A random effect probit model is used in a panel of 40 countries with monthly data over the January 1980-December 2004 period. The main results of the paper are as follows. First, size and, particularly, the composition of a country's external balance sheet are found to play an important role in the onset of crises. Second, EMEs seem to be more sensitive to external balance sheet variables than developed countries, and so too do economies with fixed or quasi-fixed exchange rate regimes. Third, further support is provided to standard theoretical explanations of currency crises. The likelihood of a crisis is found to increase with: the extent to which the real exchange rate rises above its trend; faster growth in broad money (relative to the level of international reserves); larger current account and budget balance deficits; lower GDP growth; and, if a neighbouring country already has a crisis. Economic fundamentals are also found to be a more important explanation of the onset of currency crises during the 1980s than during the 1990s, suggesting that more recent crises are less 'fundamentally' driven.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
This paper has been announced in the following NEP Reports: