IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

The contribution of domestic and external factors to emerging market currency crises: an early warning systems approach

  • Steven B. Kamin

    (International Finance Division of the Federal Reserve Board, USA)

  • John Schindler

    (International Finance Division of the Federal Reserve Board, USA)

  • Shawna Samuel

    (International Finance Division of the Federal Reserve Board, USA)

Registered author(s):

    In this paper, a modified 'early warning system' (EWS) approach is developed to identify the roles of domestic and external factors in emerging market crises. Several probit models of currency crises were estimated for 26 emerging market countries. These models were used to identify the separate contributions to the probabilities of crisis of domestic and external variables. We found that, relative to domestic factors, adverse external shocks and large external imbalances contributed little to the average estimated probability of crisis in emerging market countries, but accounted for much more of the spikes in the probability of crisis estimated to occur during actual crisis years. We interpret these results to suggest that while, on average over time, domestic factors have tended to contribute to much of the underlying vulnerability of emerging market countries, adverse swings in external factors may have been important in pushing economies 'over the edge' and into currency crisis. In consequence, the costs of giving up exchange rate flexibility through adoption of strongly fixed exchange rate regimes-e.g. currency boards or dollarization-may be quite high for some countries. Published in 2007 by John Wiley & Sons, Ltd.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://hdl.handle.net/10.1002/ijfe.314
    File Function: Link to full text; subscription required
    Download Restriction: no

    Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

    Volume (Year): 12 (2007)
    Issue (Month): 3 ()
    Pages: 317-336

    as
    in new window

    Handle: RePEc:ijf:ijfiec:v:12:y:2007:i:3:p:317-336
    Contact details of provider: Web page: http://www.interscience.wiley.com/jpages/1076-9307/

    Order Information: Web: http://jws-edcv.wiley.com/jcatalog/JournalsCatalogOrder/JournalOrder?PRINT_ISSN=1076-9307

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
    2. Joseph Joyce & Linda Kamas, 1997. "The relative importance of foreign and domestic shocks to output and prices in Mexico and Colombia," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(3), pages 458-478, September.
    3. Hali J. Edison, 2000. "Do indicators of financial crises work? an evaluation of an early warning system," International Finance Discussion Papers 675, Board of Governors of the Federal Reserve System (U.S.).
    4. Chinn, Menzie D. & Dooley, Michael P. & Shrestha, Sona, 1999. "Latin America and East Asia in the context of an insurance model of currency crises," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 659-681, August.
    5. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
    6. Bussiere, Matthieu & Fratzscher, Marcel, 2006. "Towards a new early warning system of financial crises," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 953-973, October.
    7. John H. Rogers & Ping Wang, 1993. "Output, inflation, and stabilization in a small open economy: evidence from Mexico," Research Paper 9315, Federal Reserve Bank of Dallas.
    8. Ahmed, Shaghil, 2003. "Sources of economic fluctuations in Latin America and implications for choice of exchange rate regimes," Journal of Development Economics, Elsevier, vol. 72(1), pages 181-202, October.
    9. Galindo, Arturo J. & Maloney, William F., 2002. "Second moments in speculative attack models: panel evidence," Journal of International Economics, Elsevier, vol. 56(1), pages 97-129, January.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ijf:ijfiec:v:12:y:2007:i:3:p:317-336. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)

    or (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.