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Uncertainty and currency crises: Evidence from survey data

  • Prati, Alessandro
  • Sbracia, Massimo

How does uncertainty about fundamentals affect speculation in the foreign exchange markets? This paper studies empirically the role of uncertainty in currency crises. Uncertainty, which is measured using the dispersion of survey forecasts of key macroeconomic variables, is found to have a non-monotonic effect on exchange rate pressures: it heightens speculative pressures when expected fundamentals are good and eases them when they are bad. This prediction is consistent with a broad class of currency crisis theories, ranging from first-generation to global-game models. The proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and addresses potential endogeneity bias by building a novel set of instrumental variables.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 6 (September)
Pages: 668-681

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Handle: RePEc:eee:moneco:v:57:y:2010:i:6:p:668-681
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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