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Evaluating the effect of de facto pegs on currency crises

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  • Esaka, Taro

Abstract

This paper empirically evaluates the treatment effect of de facto pegged regimes on the occurrence of currency crises. To estimate the treatment effect of pegged regimes properly, we must carefully control for the self-selection problem of regime adoption because a country's exchange rate regime choice is nonrandom. To address the self-selection problem, we thus employ a variety of matching methods. We find interesting and robust evidence that (1) pegged regimes significantly decrease the likelihood of currency crises compared with floating regimes, and (2) pegged regimes with capital account liberalization significantly lower the likelihood of currency crises compared with other regimes. From the standpoint of the macroeconomic policy trilemma, we can reasonably conclude that pegged regimes with capital account liberalization are substantially less prone to speculative attacks because they can enhance greater credibility in their currencies by maintaining strict discipline for monetary and macroeconomic policies.

Suggested Citation

  • Esaka, Taro, 2013. "Evaluating the effect of de facto pegs on currency crises," Journal of Policy Modeling, Elsevier, vol. 35(6), pages 943-963.
  • Handle: RePEc:eee:jpolmo:v:35:y:2013:i:6:p:943-963
    DOI: 10.1016/j.jpolmod.2013.02.002
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    References listed on IDEAS

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    Cited by:

    1. Nakatani, Ryota, 2017. "Real and Financial Shocks, Exchange Rate Regimes and the Probability of a Currency Crisis," MPRA Paper 82186, University Library of Munich, Germany.

    More about this item

    Keywords

    Exchange rate regimes; Capital account liberalization; Currency crises; Self-selection bias; Matching methods;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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