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On the determinants of currency crises: The role of model uncertainty

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Author Info
Jesus Crespo Cuaresma ()
Tomas Slacik ()

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Abstract

We tackle explicitly the issue of model uncertainty in the framework of binary variable models of currency crises. Using Bayesian model averaging techniques, we assess the robustness of the explanatory variables proposed in the recent literature for both static and dynamic models. Our results indicate that the variables belonging to the set of macroeconomic fundamentals proposed by the literature are very fragile determinants of the occurrence of currency crises. The results improve if the crisis index identifies a crisis period (defined as the period up to a year before a crisis) instead of a crisis occurrence. In this setting, the extent of real exchange rate misalignment and financial market indicators appear as robust determinants of crisis periods.

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Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2008-03.

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Handle: RePEc:inn:wpaper:2008-03

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Related research
Keywords: Forecasting model averaging Bayesian econometrics exchange rates.

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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  1. Carmen Fernandez & Eduardo Ley & Mark Steel, 1999. "Model uncertainty in cross-country growth regressions," Econometrics 9903003, EconWPA, revised 06 Oct 2001. [Downloadable!]
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  2. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August. [Downloadable!] (restricted)
  3. Gernot Doppelhofer & Melvyn Weeks, 2007. "Jointness of Growth Determinants," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November. [Downloadable!] (restricted)
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  5. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany. [Downloadable!]
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  6. William A. Brock & Steven N. Durlauf & Kenneth D. West, 2003. "Policy Evaluation in Uncertain Economic Environments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2003-1), pages 235-322. [Downloadable!]
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  7. Abdul Abiad, 2003. "Early Warning Systems: A Survey and a Regime-Switching Approach," IMF Working Papers 03/32, International Monetary Fund. [Downloadable!]
  8. repec:att:wimass:1920315 is not listed on IDEAS
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This page was last updated on 2008-7-3.

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