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Uncertainty and Currency Crises: Evidence from Survey Data

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  • Prati, Alessandro
  • Sbracia, Massimo

Abstract

This paper studies empirically how uncertainty affects speculation in the foreign exchange markets. We use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals. We find that uncertainty has a non-monotone effect on exchange rate pressures: namely, uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad. We prove that this prediction arises from a broad class of currency crisis theories, ranging from first-generation to global-game models. We also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias.

Suggested Citation

  • Prati, Alessandro & Sbracia, Massimo, 2010. "Uncertainty and Currency Crises: Evidence from Survey Data," MPRA Paper 21209, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:21209
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    References listed on IDEAS

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    Cited by:

    1. Berument, M. Hakan & Dincer, N. Nergiz & Mustafaoglu, Zafer, 2012. "Effects of growth volatility on economic performance – Empirical evidence from Turkey," European Journal of Operational Research, Elsevier, vol. 217(2), pages 351-356.
    2. Fendel, Ralf & Rülke, Jan-Christoph, 2012. "Some international evidence on the Lucas Supply Function," Economics Letters, Elsevier, vol. 114(2), pages 157-160.
    3. Gauvin, L. & McLoughlin, C. & Reinhardt, D., 2013. "Policy Uncertainty Spillovers to Emerging Markets - Evidence from Capital Flows," Working papers 435, Banque de France.
    4. Daniel Laskar, 2013. "Ambiguity, Pessimism, Optimism and Financial Crises in a Simple Global Game Model," PSE Working Papers hal-00811923, HAL.
    5. Jan-Christoph Rülke & Maria Silgoner & Julia Wörz, 2012. "Herding Behavior of Business Cycle Forecasters in Times of Economic Crises," WHU Working Paper Series - Economics Group 12-03, WHU - Otto Beisheim School of Management.
    6. Martínez Ignacio & Mursa Gabriel, 2016. "From Orthodoxy to Heterodoxy: Financial Crisis Literature Compared," Scientific Annals of Economics and Business, De Gruyter Open, vol. 63(s1), pages 71-87, December.
    7. Rülke, Jan-Christoph & Silgoner, Maria & Wörz, Julia, 2016. "Herding behavior of business cycle forecasters," International Journal of Forecasting, Elsevier, vol. 32(1), pages 23-33.

    More about this item

    Keywords

    First-generation models; Global games; Information; Speculation;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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