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Currency Crises Models for Emerging Markets

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Author Info

  • P.J.G. Vlaar

Abstract

In this paper, a new method is introduced to predict currency crises. The method models a continuous crisis index, based on depreciations and reserve losses. The fact that during currency crises, the behaviour of market participants differs from normal circumstances is modelled by means of model with two regimes, one for troubled, and one for normal times. Both the probability of entering the crisis regime, and the expected depreciation and volatility in this regime depend on economic circumstances. The probability of crisis can be explained by the real exchange rate, the inflation rate, the growth of the short-term debt over reserves ratio, the reserves over M2 ratio, and the imports over exports ratio, whereas the depth of a crisis is primarily related to local depreciations and the short term debt over reserves ratio. The most important factors for explaining current month's crisis index are recent changes in the exchange rate and reserves themselves however. The model is reasonably successful in predicting currency crises, also out of sample.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 595.

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Date of creation: 1999
Date of revision:
Handle: RePEc:dnb:wormem:595

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Related research

Keywords: Panel data; endogenous jumps; two regime econometric model; fundamentals;

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Cited by:
  1. Andrew Berg & Eduardo Borensztein & Catherine A. Pattillo, 2004. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Working Papers 04/52, International Monetary Fund.
  2. Arias, Guillaume & Erlandsson, Ulf, 2004. "Regime switching as an alternative early warning system of currency crises - an application to South-East Asia," Working Papers 2004:11, Lund University, Department of Economics.
  3. Jianping Shi & Yu Gao, 2010. "A study on KLR financial crisis early-warning model," Frontiers of Economics in China, Springer, vol. 5(2), pages 254-275, June.
  4. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
  5. Komulainen, Tuomas & Lukkarila, Johanna, 2003. "What drives financial crises in emerging markets?," BOFIT Discussion Papers 5/2003, Bank of Finland, Institute for Economies in Transition.
  6. Frankel, Jeffrey & Saravelos, George, 2011. "Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis," Working Paper Series rwp11-024, Harvard University, John F. Kennedy School of Government.
  7. Joël van der Weele, 2005. "Financing development: debt versus equity," DNB Working Papers 038, Netherlands Central Bank, Research Department.
  8. Abdul Abiad, 2003. "Early Warning Systems: A Survey and a Regime-Switching Approach," IMF Working Papers 03/32, International Monetary Fund.
  9. Ari, Ali, 2012. "Early warning systems for currency crises: The Turkish case," Economic Systems, Elsevier, vol. 36(3), pages 391-410.

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