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Exchange Market Pressures and Speculative Capital Flows in Selected European Countries

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  • Ceyla Pazarbasioglu
  • Inci Ötker

Abstract

This paper estimates a speculative attack model of currency crises in an attempt to identify the roles of macroeconomic fundamentals and speculative market pressures in the recent crisis, as well as earlier devaluations in adjustable fixed exchange rate systems in the European currency markets. For a sample of five countries, including Denmark, Ireland, Spain, Norway, and Sweden, our empirical analyses show that both economic fundamentals and speculative factors have a significant influence on the probability of devaluations. The recent experience in the European foreign exchange markets suggests that the latest realignments are mainly the result of foreign exchange market tensions amidst the growing conflict between the needs of the domestic economies and the policies needed to maintain fixed exchange rates. Our results confirm that regardless of the source of the deterioration in economic conditions, market participants perceived the existing parities of the currencies in these five countries as inconsistent with their underlying economic fundamentals, thus effectively bringing about either a realignment or a modification of the exchange arrangement.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 94/21.

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Length: 72
Date of creation: 01 Feb 1994
Date of revision:
Handle: RePEc:imf:imfwpa:94/21

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Cited by:
  1. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  2. Andre Cartapanis, 2004. "Le declenchement des crises de change : qu'avons-nous appris depuis dix ans ?," Economie Internationale, CEPII research center, CEPII research center, issue 97, pages 5-48.
  3. W. R. M. Perraudin & Manmohan S. Kumar & Uma Moorthy, 2002. "Predicting Emerging Market Currency Crashes," IMF Working Papers, International Monetary Fund 02/7, International Monetary Fund.
  4. Lin, Chin-Shien & Khan, Haider A. & Chang, Ruei-Yuan & Wang, Ying-Chieh, 2008. "A new approach to modeling early warning systems for currency crises: Can a machine-learning fuzzy expert system predict the currency crises effectively?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(7), pages 1098-1121, November.
  5. Galindo, Arturo J. & Maloney, William F., 2002. "Second moments in speculative attack models: panel evidence," Journal of International Economics, Elsevier, Elsevier, vol. 56(1), pages 97-129, January.
  6. Hiroya Akiba & Yonghui Jia, 2007. "Reassessment Of Currency Index By Fundamentals," Annals of Economics and Finance, Society for AEF, vol. 8(1), pages 65-93, May.
  7. Shankar, Rashmi, 2002. "Distinguishing between observationally equivalent theories of crises," Policy Research Working Paper Series 2926, The World Bank.
  8. Shankar, Rashmi, 2005. "Insurance and liquidity : panel evidence," Policy Research Working Paper Series 3648, The World Bank.
  9. Forsman, Mats-Ola, 2005. "Speculative Attacks on Nordic Exchange-Rates, 1971-1992," Working Papers in Economics, University of Gothenburg, Department of Economics 186, University of Gothenburg, Department of Economics.
  10. Buch, Claudia M. & Heinrich, Ralph P. & Piazolo, Daniel, 1998. "Southern enlargement of the European Union and capital account liberalization: Lessons for Central and Eastern Europe," Kiel Working Papers 871, Kiel Institute for the World Economy.

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