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

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  • Jesus Crespo Cuaresma

    ()

  • Tomas Slacik

    ()

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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Bibliographic Info

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

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Length: 30
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Handle: RePEc:inn:wpaper:2008-03

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Keywords: Forecasting; model averaging; Bayesian econometrics; exchange rates.;

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References

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  1. Gernot Doppelhofer & Melvyn Weeks, 2007. "Jointness of Growth Determinants," CESifo Working Paper Series 1978, CESifo Group Munich.
  2. 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(1), pages 235-322.
  3. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," NBER Working Papers 7750, National Bureau of Economic Research, Inc.
  4. Abdul Abiad, 2003. "Early Warning Systems: A Survey and a Regime-Switching Approach," IMF Working Papers 03/32, International Monetary Fund.
  5. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
  6. Carmen Fernandez & Eduardo Ley & Mark Steel, 2001. "Model uncertainty in cross-country growth regressions," Econometrics 0110002, EconWPA.
  7. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
  8. 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.
  9. Doppelhofer, G. & Cuaresma, J.C., 2007. "Nonlinearities in Cross-Country Growth Regressions: A Bayesian Averaging of Thresholds (BAT) Approach," Cambridge Working Papers in Economics 0706, Faculty of Economics, University of Cambridge.
  10. Jesús Crespo Cuaresma & Tomáš Slacík, 2007. "Predicting Currency Crises Using the Term Structure of Relative Interest Rates: Case Studies of the Czech Republic and Russia," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1.
  11. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  12. 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.
  13. Peltonen, Tuomas A., 2006. "Are emerging market currency crises predictable? A test," Working Paper Series 0571, European Central Bank.
  14. Bussière, Matthieu & Fratzscher, Marcel, 2002. "Towards a new early warning system of financial crises," Working Paper Series 0145, European Central Bank.
  15. Matthieu Bussi�re, 2013. "Balance of payment crises in emerging markets: how early were the ‘early’ warning signals?," Applied Economics, Taylor & Francis Journals, vol. 45(12), pages 1601-1623, April.
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Cited by:
  1. Babecký, Jan & Havránek, Tomáš & Matějů, Jakub & Rusnák, Marek & Šmídková, Kateřina & Vašíček, Bořek, 2013. "Leading indicators of crisis incidence: Evidence from developed countries," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 1-19.
  2. Claessens, Stijn & Kose, Ayhan, 2013. "Financial Crises: Explanations, Types, and Implications," CEPR Discussion Papers 9329, C.E.P.R. Discussion Papers.
  3. Moral-Benito, Enrique, 2010. "Model averaging in economics," MPRA Paper 26047, University Library of Munich, Germany.
  4. Jan Babecký & Tomáš Havránek & Jakub Mateju & Marek Rusnák & Katerina Šmídková & Borek Vašícek, 2012. "Banking, Debt, and Currency Crises: Early Warning Indicators for Developed Countries," Working Papers IES 2012/20, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2012.
  5. Jesús Crespo Cuaresma & Tomáš Slacík, 2008. "Determinants of Currency Crises: A Conflict of Generations?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1.
  6. Željka Asanović, 2013. "Early Warning Systems for Banking Crises in Montenegro: Combination of Signal Approach and Logit Model," Transition Studies Review, Springer, vol. 20(3), pages 405-419, November.
  7. Tomás Slacík, 2008. "(How) Will the Euro Affect Inflation in the Czech Republic? A contribution to the current debate," FIW Working Paper series 018, FIW.
  8. Vanina Forget, 2012. "Doing well and doing good: a multi-dimensional puzzle," Working Papers hal-00672037, HAL.

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