Ebook Currency Crises in Developed and Emerging Market Economies: A Comparative Empirical Treatment
One of the most persuasive arguments in favor of a fixed exchange rate regime is that it imposes discipline on monetary and fiscal policies. Another compelling argument is that it alleviates problems of noncooperative decision making on the part of governments of interdependent economies. Fixing the exchange rate is therefore seen as a surrogate form of international policy coordination.
These arguments, in effect, reinforce the belief that it is impossible to pursue a fixed exchange rate regime and monetary policies simultaneously. However, they do not take into consideration the speculative behavior of foreign exchange market participants, whose actions can have a decided impact on the value of a country's currency. Throughout the history of fixed exchange rates, both developed and emerging market economies have experienced repeated speculative currency attacks. Many of these attacks can occur unexpectedly, have real effects, and be purely self-fulfilling; moreover, they can sometimes be difficult to prevent.
The far-reaching consequences of currency crises were dramatically highlighted with the 1997 Asian crisis, which ignited debate in academic and political circles about the causes and effects of such crises. This study presents a comparative empirical treatment of speculative attacks that may result in crises in developed and emerging market economies. The severity of such attacks is examined within the context of the varying economic conditions that characterize these economies. It is critically important to determine whether one group of countries routinely suffers greater adverse effects from a similar attack. Another area of focus is the relative importance of political influences in contributing to an explanation of the incidence of speculative attacks. Yet another aspect of the research establishes the existence of “contagion” within foreign exchange markets.
The study uses a logit model that considers how various macroeconomic data and political events affect the probability of a crisis. It is based on data from 21 developed economies and 16 emerging market economies, with an emphasis on variables that are consistent with the literature on speculative attacks and currency crises.
The paper is organized as follows: Section II examines currency crises within a historical context; Section III discusses the work of various authors who have tried to explain currency crises; Section IV presents a detailed empirical analysis of the crisis phenomenon; and Section V presents the paper’s conclusions.
Contents
I. Introduction
II. Historical Perspective
III. Discussion of the Literature
IV. Empirical Analysis
- A. Framework for Empirical Analysis
B. Data and Empirical Measurement of Currency Crises
C. Estimation and Forecasting Ability
D. Results Based on the Inclusion of the Macroeconomic and Political Risk Variables
E. Results Based on a Comparison Between Developed and Emerging Market Economies
F. Results Based on Estimation and Forecasting
V. Conclusion
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