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A Perspectiveon Predicting Currency Crises

Author

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  • Robert P Flood
  • Juan Yepez
  • Nancy P. Marion

Abstract

Currency crises are difficult to predict. It could be that we are choosing the wrong variables or using the wrong models or adopting measurement techniques not up to the task. We set up a Monte Carlo experiment designed to evaluate the measurement techniques. In our study, the methods are given the right fundamentals and the right models and are evaluated on how closely the estimated predictions match the objectively correct predictions. We find that all methods do reasonably well when fundamentals are explosive and all do badly when fundamentals are merely highly volatile.

Suggested Citation

  • Robert P Flood & Juan Yepez & Nancy P. Marion, 2010. "A Perspectiveon Predicting Currency Crises," IMF Working Papers 10/227, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/227
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=24271
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    References listed on IDEAS

    as
    1. Cumby, Robert E. & Van Wijnbergen, Sweder, 1989. "Financial policy and speculative runs with a crawling peg: Argentina 1979-1981," Journal of International Economics, Elsevier, vol. 27(1-2), pages 111-127, August.
    2. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-648, August.
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    Keywords

    Currency crises; Currencies; Economic forecasting; Devaluation; Financial crisis; Forecasting models; Speculative attacks; fixed exchange rate; Monte Carlo; probabilities; standard deviation; probability; correlation;

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