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Explaining Currency Crises: A Duration Model Approach

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  • M M Tudela

Abstract

This paper is an empirical investigation into the duration of exchange rate episodes characterized by the absence of speculative attacks. We estimate a duration model for OECD countries during the 1970-1997 period. Specifically, we use semi-parametric methods to estimate model with unrestricted base-line hazards. The use of duration models allows us to account for duration dependence among the determinants of the likelihood of speculative attacks. We can test if the length of the time already spent on the peg is a determinant of the probability of exit into a currency crisis state. The results indicate, first, that increases in export growth, bank deposits growth and openness predict a decrease in the probability of exit into a currency crises state. Whereas, increases in import growth; claims on government and capital inflows in terms of portfolio investment and appreciated REER, contribute positively to the likelihood of an occurrence of a crisis. And second, the existence of a highly significant negative duration dependence. The highest probability of exit into a currency crash state is given at the initial of the peg, decreasing afterwards. This suggests the existence of a political cost of realignment that changes over the duration of the spell;growing credibility surrounding an exchange-rate-based stabilization program reduce the probability that the peg will be abandoned.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0487.

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Date of creation: Jan 2001
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Handle: RePEc:cep:cepdps:dp0487

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

Keywords: Currency crises; speculative attacks; exchange rates; hazard functions; duration models;

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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. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
  3. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
  4. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
  5. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  6. 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.
  7. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  8. Klein, Michael W. & Marion, Nancy P., 1997. "Explaining the duration of exchange-rate pegs," Journal of Development Economics, Elsevier, vol. 54(2), pages 387-404, December.
  9. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 534, Board of Governors of the Federal Reserve System (U.S.).
  10. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
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Citations

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Cited by:
  1. Jo-Hui Chen & Chih-Sean Chen, 2012. "The study of contagious paces of financial crises," Quality & Quantity: International Journal of Methodology, Springer, vol. 46(6), pages 1825-1846, October.
  2. Gagnon, Joseph E., 2009. "Currency crashes and bond yields in industrial countries," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 161-181, February.
  3. Zorobabel Bicaba & Daniel Kapp & Francesco Molteni, 2011. "Stability periods between financial crises: The role of macroeconomic fundamentals and crises management policies," Documents de travail du Centre d'Economie de la Sorbonne 11064, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. Sean Barrett, 2005. "Risk Equalisation and Competition in the Irish Health Insurance Market," Trinity Economics Papers, Trinity College Dublin, Department of Economics 200058, Trinity College Dublin, Department of Economics.
  5. Sébastien Wälti, 2005. "The duration of fixed exchange rate regimes," The Institute for International Integration Studies Discussion Paper Series iiisdp96, IIIS.
  6. Thomson Fontaine, 2005. "Currency Crises in Developed and Emerging Market Economies," IMF Working Papers 05/13, International Monetary Fund.
  7. M. Kabir Hassan & Jung Suk-Yu, 2007. "Rational Speculative Bubbles: An Empirical Investigation of the Middle East and North African Stock Markets," NFI Working Papers 2007-WP-31, Indiana State University, Scott College of Business, Networks Financial Institute.
  8. Guy Debelle & Gabriele Galati, 2007. "Current Account Adjustment and Capital Flows," Review of International Economics, Wiley Blackwell, vol. 15(5), pages 989-1013, November.
  9. Jung-Suk Yu & M. Kabir Hassan, 2010. "Rational speculative bubbles in MENA stock markets," Studies in Economics and Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 27(3), pages 247-264, August.
  10. Trebesch, Christoph, 2008. "Delays in Sovereign Debt Restructurings. Should we really blame the creditors?," Proceedings of the German Development Economics Conference, Zurich 2008 44, Verein für Socialpolitik, Research Committee Development Economics.
  11. repec:tcd:wpaper:tep8 is not listed on IDEAS
  12. Klaassen, Franc & Jager, Henk, 2011. "Definition-consistent measurement of exchange market pressure," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 74-95, February.
  13. repec:hal:journl:halshs-00639869 is not listed on IDEAS
  14. Mohammad Karimi & Marcel-Cristian Voia, 2011. "Empirics of Currency Crises: A Duration Analysis Approach," Carleton Economic Papers 11-11, Carleton University, Department of Economics.
  15. Fiess, Norbert & Shankar, Rashmi, 2009. "Determinants of exchange rate regime switching," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 68-98, February.
  16. Tamgac, Unay, 2013. "Duration of fixed exchange rate regimes in emerging economies," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 439-467.
  17. Jo-Hui Chen, 2010. "Gender difference and job replacement for mutual fund," Quality & Quantity: International Journal of Methodology, Springer, vol. 44(4), pages 661-671, June.
  18. Mohammad Karimi & Marcel-Cristian Voia, 2011. "Identifying Extreme Values of Exchange Market Pressure," Carleton Economic Papers 11-10, Carleton University, Department of Economics.

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