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An Eclectic Approach to Currency Crises: Drawing Lessons from the EMS Experience

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  • Reyes Maroto Illera
  • Francisco Pérez Bermejo
  • Simón Sosvilla-Rivero
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    Abstract

    This paper examines the regime changes in the European Exchange Rate Mechanism (ERM), making use of the duration model approach covering the complete European Monetary System (EMS) history. From the nonparametric (univariate) analysis, we find that the probability of maintaining the current regime decreases very rapidly for the short durations to register then smoother variations as time increases. When applying a parametric (multivariate) analysis to investigate the role of other variables in the probability of a regime change, and using three different theoretical frameworks to select potential explanatory variables (the first generation models of currency crisis, the second generation models of currency crisis, and an "eclectic" approach), we find that the deviation from the central parity, the interest rate differential with respect to Germany and the real exchange rate would have negatively affected the probability of survival of a given regime, while credibility, the price level in Germany and the reserves stock would have positively influenced such probability.

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    Bibliographic Info

    Paper provided by FEDEA in its series Working Papers with number 2002-22.

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    Handle: RePEc:fda:fdaddt:2002-22

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    Cited by:
    1. Simón Sosvilla-Rivero & Francisco Pérez-Bermejo, . "Credibility and Duration in Target Zones: Evidence from the EMS," Working Papers 2003-19, FEDEA.

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