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On the determinants of currency crises: The role of model uncertainty

  • Jesus Crespo Cuaresma

    ()

  • Tomas Slacik

    ()

We tackle explicitly the issue of model uncertainty in the framework of binary variable models of currency crises. Using Bayesian model averaging techniques, we assess the robustness of the explanatory variables proposed in the recent literature for both static and dynamic models. Our results indicate that the variables belonging to the set of macroeconomic fundamentals proposed by the literature are very fragile determinants of the occurrence of currency crises. The results improve if the crisis index identifies a crisis period (defined as the period up to a year before a crisis) instead of a crisis occurrence. In this setting, the extent of real exchange rate misalignment and financial market indicators appear as robust determinants of crisis periods.

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Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2008-03.

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Handle: RePEc:inn:wpaper:2008-03
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  1. William A. Brock & Steven N. Durlauf & Kenneth D. West, 2003. "Policy Evaluation in Uncertain Economic Environments," NBER Working Papers 10025, National Bureau of Economic Research, Inc.
  2. Doppelhofer, G. & Cuaresma, J.C., 2007. "Nonlinearities in Cross-Country Growth Regressions: A Bayesian Averaging of Thresholds (BAT) Approach," Cambridge Working Papers in Economics 0706, Faculty of Economics, University of Cambridge.
  3. Jesús Crespo Cuaresma & Tomáš Slacík, 2007. "Predicting Currency Crises Using the Term Structure of Relative Interest Rates: Case Studies of the Czech Republic and Russia," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 135-149.
  4. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
  5. Peltonen, Tuomas A., 2006. "Are emerging market currency crises predictable? A test," Working Paper Series 0571, European Central Bank.
  6. Abdul Abiad, 2003. "Early Warning Systems; A Survey and a Regime-Switching Approach," IMF Working Papers 03/32, International Monetary Fund.
  7. Bussière, Matthieu, 2007. "Balance of payment crises in emerging markets: how early were the “early” warning signals?," Working Paper Series 0713, European Central Bank.
  8. 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.
  9. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  10. Carmen Fernandez & Eduardo Ley & Mark Steel, 2001. "Model uncertainty in cross-country growth regressions," Econometrics 0110002, EconWPA.
  11. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (Bace) Approach," OECD Economics Department Working Papers 266, OECD Publishing.
  12. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  13. Doppelhofer, G. & Weeks, M., 2005. "Jointness of Growth Determinants," Cambridge Working Papers in Economics 0542, Faculty of Economics, University of Cambridge.
  14. Fratzscher, Marcel & Matthieu Bussiere, 2003. "Towards A New Early Warning System of Financial Crises," Royal Economic Society Annual Conference 2003 81, Royal Economic Society.
  15. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
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