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Exchange Rate Regimes and Currency Crises: an Evaluation using Extreme Value Theory

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  • Fasika Damte Haile
  • Susan Pozo

Abstract

We test whether the exchange regime in place has an impact on the vulnerability of countries to currency crises. Our paper is distinguishable from others (i) in its use of extreme value theory to identify currency crisis periods and (ii) in using two separate designations for the exchange regime in place. The first is the self‐reported or announced exchange rate system. The second classification scheme, by Levy‐Yeyati and Sturzenegger, is based on the relative movements of international reserves and exchange rates. The Levy‐Yeyati and Sturzenegger procedure is intended to reveal the actual as distinct from the “legal” exchange arrangement. We find, interestingly, that the announced exchange regime has an impact on the likelihood of currency crises, while the “true” or observed regime does not. Announced pegged exchange regimes increase the risk of currency crisis even if, in reality, the exchange rate system in place is not pegged.

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  • Fasika Damte Haile & Susan Pozo, 2006. "Exchange Rate Regimes and Currency Crises: an Evaluation using Extreme Value Theory," Review of International Economics, Wiley Blackwell, vol. 14(4), pages 554-570, September.
    • Handle: RePEc:bla:reviec:v:14:y:2006:i:4:p:554-570
    DOI: 10.1111/j.1467-9396.2006.00643.x
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    1. Mr. Thomas Philippon & Mr. Jeromin Zettelmeyer & Mr. Eduardo Borensztein, 2001. "Monetary Independence in Emerging Markets: Does the Exchange Rate Regime Make a Difference?," IMF Working Papers 2001/001, International Monetary Fund.
    2. Wagner, Niklas & Marsh, Terry, 2000. "On Adaptive Tail Index Estimation for Financial Return Models," Research Program in Finance, Working Paper Series qt2651k8f5, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
    3. Niklas Wagner and Terry Marsh., 2000. "On Adaptive Tail Index Estimation for Financial Return Models," Research Program in Finance Working Papers RPF-295, University of California at Berkeley.
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