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Currency Crises and Uncertainty About Fundamentals

  • M. Sbracia
  • Alessandro Prati

This paper studies how uncertainty about fundamentals contributed to currency crises from both a theoretical and an empirical perspective. We find evidenceCbased on a monthly dataset of Consensus forecasts for six Asian countries in the period January 1995-May 2001Cconfirming the theoretical predictions (from both unique- and multiple-equilibria models) that: (i) speculative attacks depend not only on actual and expected fundamentals but also on the variance of speculators' expectations about them; and (ii) the sign of the effect of the variance depends on whether expected fundamentals are "good" or "bad." These results are robust to the definition of exchange rate pressure indices, the estimation sample (precrisis vs. full sample), the method chosen to avoid spurious correlations, and possible time-varying coefficients for the mean, the variance, and the threshold separating good from bad expected fundamentals.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/3.

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Length: 46
Date of creation: 01 Jan 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/3
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  1. Stephen Morris & Hyun Song Shin, 1999. "Coordination Risk and the Price of Debt," Cowles Foundation Discussion Papers 1241R, Cowles Foundation for Research in Economics, Yale University, revised Feb 2002.
  2. Bernard Dumas & Lars E.O. Svensson, 1991. "How Long do Unilateral Target Zones Last?," NBER Working Papers 3931, National Bureau of Economic Research, Inc.
  3. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
  4. Bryan Routledge & Stanley Zin, 2009. "Model Uncertainty and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 543-566, October.
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  6. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  7. Frankel, David M. & Morris, Stephen & Pauzner, Ady, 2003. "Equilibrium Selection in Global Games with Strategic Complementarities," Staff General Research Papers 11920, Iowa State University, Department of Economics.
  8. Olivier Jeanne & Andrew K. Rose, 1999. "Noise Trading and Exchange Rate Regimes," NBER Working Papers 7104, National Bureau of Economic Research, Inc.
  9. Robin Brooks & Hali Edison & Manmohan S. Kumar & Torsten Sløk, 2004. "Exchange Rates and Capital Flows," European Financial Management, European Financial Management Association, vol. 10(3), pages 511-533.
  10. Catherine A. Pattillo & Andrew Berg & Gian Milesi-Ferretti & Eduardo Borensztein, 2000. "Anticipating Balance of Payments Crises--The Role of Early Warning Systems; The Role of Early Warning Systems," IMF Occasional Papers 186, International Monetary Fund.
  11. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
  12. Sbracia, M. & Zaghini, A., 2000. "Expectations and Information in Second Generation Currency Crises Models," Papers 391, Banca Italia - Servizio di Studi.
  13. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  14. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  15. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
  16. Linda S. Goldberg, 1988. "Collapsing Exchange Rate Regimes: Shocks and Biases," NBER Working Papers 2702, National Bureau of Economic Research, Inc.
  17. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc.
  18. Chan, Kenneth S. & Chiu, Y. Stephen, 2002. "The role of (non-)transparency in a currency crisis model," European Economic Review, Elsevier, vol. 46(2), pages 397-416, February.
  19. Robert P. Flood & Nancy P. Marion, 1998. "Self-Fulfilling Risk Predictions; An Application to Speculative Attacks," IMF Working Papers 98/124, International Monetary Fund.
  20. Andrew Berg & Catherine Pattillo, 1999. "Are Currency Crises Predictable? A Test," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1.
  21. Linda S. Goldberg, 1990. "Predicting Exchange Rate Crises: Mexico Revisited," NBER Working Papers 3320, National Bureau of Economic Research, Inc.
  22. S. Morris & R. Rob & H. Shin, 2010. "p-dominance and Belief Potential," Levine's Working Paper Archive 505, David K. Levine.
  23. 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.
  24. Don E. Roper & Stephen J. Turnovsky, 1980. "Optimal Exchange Market Intervention in a Simple Stochastic Macro Model," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 296-309, May.
  25. Ranil Salgado & Luca Antonio Ricci & Francesco Caramazza, 2000. "Trade and Financial Contagion in Currency Crises," IMF Working Papers 00/55, International Monetary Fund.
  26. Weymark, Diana N, 1998. "A General Approach to Measuring Exchange Market Pressure," Oxford Economic Papers, Oxford University Press, vol. 50(1), pages 106-21, January.
  27. Grilli, Vittorio U., 1986. "Buying and selling attacks on fixed exchange rate systems," Journal of International Economics, Elsevier, vol. 20(1-2), pages 143-156, February.
  28. Marc Klau & John Hawkins, 2000. "Measuring potential vulnerabilities in emerging market economies," BIS Working Papers 91, Bank for International Settlements.
  29. Prakash Loungani, 2000. "How Accurate Are Private Sector Forecasts; Cross-Country Evidence From Consensus Forecasts of Output Growth," IMF Working Papers 00/77, International Monetary Fund.
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