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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

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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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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  1. Weber, A.A., 1991. "EMS Credibility," Papers 9103, Tilburg - Center for Economic Research.
  2. Weber, A., 1991. "EMS Credibility," Discussion Paper 1991-3, Tilburg University, Center for Economic Research.
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  15. Bajo-Rubio, Oscar & Sosvilla-Rivero, Simon & Fernandez-Rodriguez, Fernando, 2001. "Asymmetry in the EMS: New evidence based on non-linear forecasts," European Economic Review, Elsevier, vol. 45(3), pages 451-473, March.
  16. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-144, Fall.
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  22. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  23. Simon Sosvilla-Rivero & Fernando Fernandez-Rodriguez & Oscar Bajo-Rubio, 1999. "Exchange rate volatility in the EMS before and after the fall," Applied Economics Letters, Taylor and Francis Journals, vol. 6(11), pages 717-722.
  24. Lancaster, Tony, 1979. "Econometric Methods for the Duration of Unemployment," Econometrica, Econometric Society, vol. 47(4), pages 939-56, July.
  25. F. FernAndez-RodrIguez & S. Sosvilla-Rivero & J. Andrada-FElix, 2003. "Technical analysis in foreign exchange markets: evidence from the EMS," Applied Financial Economics, Taylor and Francis Journals, vol. 13(2), pages 113-122.
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Cited by:
  1. Sébastien Wälti, 2005. "The duration of fixed exchange rate regimes," Trinity Economics Papers 2000518, Trinity College Dublin, Department of Economics.
  2. Sean Barrett, 2005. "Risk Equalisation and Competition in the Irish Health Insurance Market," Trinity Economics Papers 200058, Trinity College Dublin, Department of Economics.
  3. Francisco Pérez-Bermejo & Simón Sosvilla-Rivero, . "Currency Crises and Political Factors: Drawing Lessons from the EMS Experience," Working Papers 2004-04, FEDEA.
  4. repec:tcd:wpaper:tep8 is not listed on IDEAS
  5. 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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