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Predicting Exchange Rate Crises: Mexico Revisited

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  • Goldberg, Linda S.

Abstract

This paper predicts ex-ante the probability of currency crises end size of expected devaluations month by month for Mexico between 1980 and 1986 using a heterodox linear discrete time model of exchange rate crises. The forces contributing to speculative attacks on the Mexican peso include internal money creation, external credit shocks, and relative price shocks. The framework proves highly successful for generating forecasts of the probability of speculative attacks on the peso and for predicting lower bounds for post- collapse exchange rates using a range of assumptions about critical levels of central bank reserve floors. Simulation results suggest that reducing domestic credit growth, increasing the uncertainty surrounding this growth, and reducing the size and perhaps increasing the frequency of currency realignments might have greatly reduced the amount of currency speculation against the peso in some of the crisis periods between 1980 and 1986.

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File URL: http://econ.as.nyu.edu/docs/IO/9393/RR90-11.pdf
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Bibliographic Info

Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 90-11.

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Length: 24 pages
Date of creation: 1990
Date of revision:
Handle: RePEc:cvs:starer:90-11

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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
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Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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Related research

Keywords: currencies ; exchange rate ; economic growth ; developing countries;

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  1. Linda S. Goldberg, 1988. "Collapsing Exchange Rate Regimes: Shocks and Biases," NBER Working Papers 2702, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld, 1983. "Balance-of-Payments Crises and Devaluation," NBER Working Papers 1103, National Bureau of Economic Research, Inc.
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