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Predicting sharp depreciations in industrial country exchange rates

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Author Info

  • Jonathan H. Wright
  • Joseph E. Gagnon

Abstract

This paper considers the prediction of large depreciations (both nominal and real) in a panel of industrialized countries using a probit methodology. The current account balance/GDP ratio has a modest but statistically significant effect on the estimated probability of a large depreciation, and gives slight predictive power in an out-of-sample forecasting exercise. The CPI inflation rate also has a modest but statistically significant effect in predicting nominal depreciations and has slight predictive power, but this effect is not present for real exchange rates. The GDP growth rate occasionally has a significant effect. A higher current account balance (surplus) tends to reduce the probability of a sharp depreciation; a higher inflation rate tends to increase the probability of a sharp depreciation; and a higher GDP growth rate perhaps tends to reduce the probability of a sharp depreciation.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 881.

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Date of creation: 2006
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Handle: RePEc:fip:fedgif:881

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Related research

Keywords: Foreign exchange rates ; Econometric models;

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References

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  1. McFadden, Daniel, 1974. "The measurement of urban travel demand," Journal of Public Economics, Elsevier, vol. 3(4), pages 303-328, November.
  2. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  3. Hali J. Edison, 2000. "Do indicators of financial crises work? an evaluation of an early warning system," International Finance Discussion Papers 675, Board of Governors of the Federal Reserve System (U.S.).
  4. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
  5. Kumar, Mohan & Moorthy, Uma & Perraudin, William, 2003. "Predicting emerging market currency crashes," Journal of Empirical Finance, Elsevier, vol. 10(4), pages 427-454, September.
  6. Freund, Caroline, 2005. "Current account adjustment in industrial countries," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1278-1298, December.
  7. Caroline L. Freund, 2000. "Current account adjustment in industrialized countries," International Finance Discussion Papers 692, Board of Governors of the Federal Reserve System (U.S.).
  8. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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Cited by:
  1. Mehl, Arnaud & Cappiello, Lorenzo, 2007. "Uncovered interest parity at distant horizons: evidence on emerging economies & nonlinearities," Working Paper Series 0801, European Central Bank.
  2. Meredith Beechey & P�R �Sterholm, 2008. "A Bayesian Vector Autoregressive Model with Informative Steady-state Priors for the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 84(267), pages 449-465, December.
  3. Pao-Lin Tien, 2009. "Using Long-Run Restrictions to Investigate the Sources of Exchange Rate Fluctuations," Wesleyan Economics Working Papers 2009-004, Wesleyan University, Department of Economics.
  4. Carol C. Bertaut & Steven B. Kamin & Charles P. Thomas, 2008. "How long can the unsustainable U.S. current account deficit be sustained?," International Finance Discussion Papers 935, Board of Governors of the Federal Reserve System (U.S.).

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