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Common Determinants of the Likelihood of Currency Crises in BRICS

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  • Balaga Mohana Rao
  • Puja Padhi

Abstract

We consider a panel of quarterly data for five BRICS countries for the period 1996: Q1 through 2015: Q4 to examine the currency crises. In this article, we construct an exchange market pressure index using Kaminsky, Lizondo and Reinhart (KLR) methodology to identify the crisis periods. Upon identifying the crisis periods, we examine the common determinants of the currency crises in these five counties using a panel probit model with random effects. Among the 22 identified periods across five BRICS countries, Russia has seen a currency stress quite often followed by Brazil, South Africa, China and India. Our main finding is that variables such as base money to broad money, broad money growth, current account balance, exports, imports, inflation, real interest rate and real effective exchange rate (REER) work as leading indicators of the crises and major contributing factors in a country’s vulnerability to crisis. We also find that the prediction of crises is robust at cut-off probability of 50 per cent.

Suggested Citation

  • Balaga Mohana Rao & Puja Padhi, 2020. "Common Determinants of the Likelihood of Currency Crises in BRICS," Global Business Review, International Management Institute, vol. 21(3), pages 698-712, June.
  • Handle: RePEc:sae:globus:v:21:y:2020:i:3:p:698-712
    DOI: 10.1177/0972150918779163
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