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Uncertainty and Currency Crises: Evidence from Survey Data

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  • Prati, Alessandro
  • Sbracia, Massimo

Abstract

This paper studies empirically how uncertainty affects speculation in the foreign exchange markets. We use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals. We find that uncertainty has a non-monotone effect on exchange rate pressures: namely, uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad. We prove that this prediction arises from a broad class of currency crisis theories, ranging from first-generation to global-game models. We also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21209.

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Date of creation: Mar 2010
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Handle: RePEc:pra:mprapa:21209

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Keywords: First-generation models; Global games; Information; Speculation;

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  1. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  2. Marco Ottaviani & Peter Norman Sorensen, 2001. "The Strategy of Professional Forecasting," Discussion Papers 01-09, University of Copenhagen. Department of Economics.
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Citations

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Cited by:
  1. Berument, M. Hakan & Dincer, N. Nergiz & Mustafaoglu, Zafer, 2012. "Effects of growth volatility on economic performance – Empirical evidence from Turkey," European Journal of Operational Research, Elsevier, vol. 217(2), pages 351-356.
  2. Daniel Laskar, 2013. "Ambiguity, Pessimism, Optimism and Financial Crises in a Simple Global Game Model," Working Papers hal-00811923, HAL.
  3. Fendel, Ralf & Rülke, Jan-Christoph, 2012. "Some international evidence on the Lucas Supply Function," Economics Letters, Elsevier, vol. 114(2), pages 157-160.
  4. Daniel Laskar, 2013. "Ambiguity, Pessimism, Optimism and Financial Crises in a Simple Global Game Model," PSE Working Papers hal-00811923, HAL.

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