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Second thoughts on second moments : panel evidence on asset-based models of currency crises

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  • Galindo, Arturo J.
  • Maloney, William F.

Abstract

The literature on speculative attacks has been given new impetus by the collapse of the European currency arrangements beginning in 1992, by the Mexican peso crisis and after-effects in 1994, and most recently by speculative attacks across Asia. One stand of this literature stresses the importance of imbalances in stocks of monetary and financial aggregates rather than traditional"flow"factors, arguing that massive, volatile capital flows have become a dominant feature of the global landscape, and that exchange-rate levels and current accounts have not proved convincing as proximate causes of crises. The authors test two popular asset-based models of speculative attacks -- Krugman and Rotemberg (1992) and Calvo and Mendoza (1995) -- especially their emphasis on the second moments of monetary aggregates. Analyzing monthly panels of appropriate countries in three regions, they find evidence for the importance of money/reserve ratios predicted by both models, and their variance as predicted by Calvo and Mendoza. But the variance of velocity does not appear to be important, casting some doubt on the Krugman-Rotemberg target zone framework and the interpretation of the Calvo-Mendoza results.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1939.

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Date of creation: 30 Jun 1998
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Handle: RePEc:wbk:wbrwps:1939

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Keywords: Fiscal&Monetary Policy; Payment Systems&Infrastructure; Environmental Economics&Policies; Insurance&Risk Mitigation; Economic Theory&Research; Economic Theory&Research; Fiscal&Monetary Policy; Macroeconomic Management; Environmental Economics&Policies; Economic Stabilization;

References

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  1. Froot, Kenneth & Obstfeld, Maurice, 1991. "Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach," CEPR Discussion Papers 522, C.E.P.R. Discussion Papers.
  2. Michael W. Klein & Nancy P. Marion, 1994. "Explaining the Duration of Exchange-Rate Pegs," NBER Working Papers 4651, National Bureau of Economic Research, Inc.
  3. Garber, Peter M. & Svensson, Lars E.O., 1995. "The operation and collapse of fixed exchange rate regimes," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 36, pages 1865-1911 Elsevier.
  4. Svensson, L.E.O., 1993. "Fixed Exchange Rates As a Means to Price Stability: What Have we Learned?," Papers 553, Stockholm - International Economic Studies.
  5. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  6. Edin, P.A. & Vredin, A., 1991. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Papers 1991g, Uppsala - Working Paper Series.
  7. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
  8. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
  9. 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.
  10. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Shankar, Rashmi, 2005. "Insurance and liquidity : panel evidence," Policy Research Working Paper Series 3648, The World Bank.

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