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Currency Crises During the Great Recession: Is This Time Different?

Author

Listed:
  • Tiziano Arduini

    (Sapienza, University of Rome)

  • Giuseppe De Arcangelis

    () (Sapienza, University of Rome)

  • Carlo L. Del Bello

    (Sapienza, University of Rome)

Abstract

During the 2007-2009 financial crisis the foreign exchange market was characterized by large volatility and wide currency swings. In this paper we evaluate whether during the period of the Great Recession there has been a structural break in the relationship between fundamentals and exchange rates within an early-warning framework. This is done by extending the original data set by Kaminsky and Reinhart (1999) and including not only the most recent period, but also 17 new countries. Our analysis considers two variations of the original early-warning system. First, we propose two new methods to obtain the probability distribution of the early-warning indicator (conditional on the occurrence of a crisis) - one fully parametric and one based on a novel distribution-free semi-parametric approach. Second, we compare the original early-warning indicator with a core indicator that includes only "pseudo- nancial variables" (domestic credit/GDP, the real exchange rate, international reserves and the real interest-rate di erential) and we evaluate their performance not only for currency crises during the Great Recession, but also for the Asian Crisis. All tests make us conclude that "this time is different", i.e. early-warning systems based on traditional macroeconomic variables have not only failed to forecast currency crises during the Great Recession, but have also significantly worsened with respect to the period of the Asian crisis.

Suggested Citation

  • Tiziano Arduini & Giuseppe De Arcangelis & Carlo L. Del Bello, 2011. "Currency Crises During the Great Recession: Is This Time Different?," Working Papers 1/11, Sapienza University of Rome, DISS.
  • Handle: RePEc:saq:wpaper:1/11
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    References listed on IDEAS

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    1. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    2. Morris Goldstein & Carmen M. Reinhart, 2000. "Assessing Financial Vulnerability: An Early Warning System for Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 100.
    3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    4. 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.
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    6. Hali J. Edison, 2003. "Do indicators of financial crises work? An evaluation of an early warning system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 11-53.
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    Cited by:

    1. Jon Frost & Ayako Saiki, 2014. "Early Warning for Currency Crises: What Is the Role of Financial Openness?," Review of International Economics, Wiley Blackwell, vol. 22(4), pages 722-743, September.
    2. Tiziano Arduini & Giuseppe De Arcangelis & Carlo L. Del Bello, 2012. "Balance-of-Payments Crises During the Great Recession: Is This Time Different?," Review of International Economics, Wiley Blackwell, vol. 20(3), pages 517-534, August.

    More about this item

    Keywords

    EarlyWarning Systems; Exchange Rates; Semi-parametric Methods.;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • F30 - International Economics - - International Finance - - - General

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