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Explaining Currency Crises: A Duration Model Approach

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  • M M Tudela

Abstract

This paper is an empirical investigation into the duration of exchange rate episodes characterized by the absence of speculative attacks. We estimate a duration model for OECD countries during the 1970-1997 period. Specifically, we use semi-parametric methods to estimate model with unrestricted base-line hazards. The use of duration models allows us to account for duration dependence among the determinants of the likelihood of speculative attacks. We can test if the length of the time already spent on the peg is a determinant of the probability of exit into a currency crisis state. The results indicate, first, that increases in export growth, bank deposits growth and openness predict a decrease in the probability of exit into a currency crises state. Whereas, increases in import growth; claims on government and capital inflows in terms of portfolio investment and appreciated REER, contribute positively to the likelihood of an occurrence of a crisis. And second, the existence of a highly significant negative duration dependence. The highest probability of exit into a currency crash state is given at the initial of the peg, decreasing afterwards. This suggests the existence of a political cost of realignment that changes over the duration of the spell;growing credibility surrounding an exchange-rate-based stabilization program reduce the probability that the peg will be abandoned.

Suggested Citation

  • M M Tudela, 2001. "Explaining Currency Crises: A Duration Model Approach," CEP Discussion Papers dp0487, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0487
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    References listed on IDEAS

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    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    2. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-484, December.
    3. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    4. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
    5. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
    6. 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.
    7. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
    8. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-679, June.
    9. Klein, Michael W. & Marion, Nancy P., 1997. "Explaining the duration of exchange-rate pegs," Journal of Development Economics, Elsevier, vol. 54(2), pages 387-404, December.
    10. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
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