Currency Crises and Uncertainty About Fundamentals

January 1, 2002

Preview Citation

Format: Chicago

M. Sbracia, and Alessandro Prati. Currency Crises and Uncertainty About Fundamentals, (USA: International Monetary Fund, 2002) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies how uncertainty about fundamentals contributed to currency crises from both a theoretical and an empirical perspective. We find evidenceCbased on a monthly dataset of Consensus forecasts for six Asian countries in the period January 1995-May 2001Cconfirming the theoretical predictions (from both unique- and multiple-equilibria models) that: (i) speculative attacks depend not only on actual and expected fundamentals but also on the variance of speculators' expectations about them; and (ii) the sign of the effect of the variance depends on whether expected fundamentals are "good" or "bad." These results are robust to the definition of exchange rate pressure indices, the estimation sample (precrisis vs. full sample), the method chosen to avoid spurious correlations, and possible time-varying coefficients for the mean, the variance, and the threshold separating good from bad expected fundamentals.

Subject: Currencies, Currency crises, Exchange rate arrangements, Exchange rate indexes, Exchange rates, Financial crises, Foreign exchange, Money

Keywords: Currencies, Currency crises, Currency peg, Equilibrium speculator, Europe, Exchange rate, Exchange rate arrangements, Exchange rate crisis, Exchange rate indexes, Exchange rate pressure, Exchange rates, Indirect effect, Pressure indices, Public and private information, Share of speculator, Speculative attack, SUR estimation method, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2002/003
Stock No:

WPIEA0032002
ISBN:

9781451841916
ISSN:

1018-5941

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