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Currency Crises Models for Emerging Markets

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  • P.J.G. Vlaar

Abstract

In this paper, a new method is introduced to predict currency crises. The method models a continuous crisis index, based on depreciations and reserve losses. The fact that during currency crises, the behaviour of market participants differs from normal circumstances is modelled by means of model with two regimes, one for troubled, and one for normal times. Both the probability of entering the crisis regime, and the expected depreciation and volatility in this regime depend on economic circumstances. The probability of crisis can be explained by the real exchange rate, the inflation rate, the growth of the short-term debt over reserves ratio, the reserves over M2 ratio, and the imports over exports ratio, whereas the depth of a crisis is primarily related to local depreciations and the short term debt over reserves ratio. The most important factors for explaining current month's crisis index are recent changes in the exchange rate and reserves themselves however. The model is reasonably successful in predicting currency crises, also out of sample.

Suggested Citation

  • P.J.G. Vlaar, 1999. "Currency Crises Models for Emerging Markets," WO Research Memoranda (discontinued) 595, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:595
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    File URL: https://www.dnb.nl/binaries/wo0595_tcm46-145915.pdf
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    Citations

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    Cited by:

    1. Frankel, Jeffrey & Saravelos, George, 2012. "Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis," Journal of International Economics, Elsevier, pages 216-231.
    2. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 1-5.
    3. Abdul d Abiad, 2003. "Early Warning Systems; A Survey and a Regime-Switching Approach," IMF Working Papers 03/32, International Monetary Fund.
    4. Ari, Ali, 2012. "Early warning systems for currency crises: The Turkish case," Economic Systems, Elsevier, vol. 36(3), pages 391-410.
    5. KOMULAINEN Tuomas LUKKARILA Johanna, "undated". "What Drives Financial Crises in Emerging Markets?," EcoMod2003 330700082, EcoMod.
    6. Jianping Shi & Yu Gao, 2010. "A study on KLR financial crisis early-warning model," Frontiers of Economics in China, Springer;Higher Education Press, pages 254-275.
    7. Arias, Guillaume & Erlandsson, Ulf, 2004. "Regime switching as an alternative early warning system of currency crises - an application to South-East Asia," Working Papers 2004:11, Lund University, Department of Economics.
    8. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
    9. Michael D. Hurd & Susann Rohwedder, 2005. "Changes in Consumption and Activities in Retirement," Working Papers wp096, University of Michigan, Michigan Retirement Research Center.

    More about this item

    Keywords

    Panel data; endogenous jumps; two regime econometric model; fundamentals;

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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