A regime-switching approach to the study of speculative attacks: A focus on EMS crises
This paper implements a regime-switching framework to study speculative attacks against EMS currencies during 1979-1993. To identify speculative episodes, we model exchange rates, reserves, and interest rates as time series subject to discrete regime shifts between two possible states: "tranquil" and "speculative". We allow the probabilities of switching between states to be a function of fundamentals and expectations. The regime-switching framework improves the ability to identify speculative attacks vis-à-vis the indices of speculative pressure used in the literature. The results also indicate that fundamentals (particularly budget deficits) and expectations drive the probability of switching to a speculative state.
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Volume (Year): 27 (2002)
Issue (Month): 2 ()
|Note:||Received: October 2000/Final Version Received: June 2001|
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