Leading Indicators of Currency Crises: Are They the Same in Different Exchange Rate Regimes?

Zhao, Yanping; Haan, Jakob de; Scholtens, Bert; Yang, Haiyan

doi:10.1007/s11079-014-9315-y

Cited by 11 publications

(7 citation statements)

References 59 publications

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“…The third generation models emphasise the role of banking system vulnerability and weaknesses in contributing to a higher probability of currency crisis occurrence. The indicators included from these models are interest rate spread with an expected positive sign (Bajona and Peng, 2008; Zhao et al , 2014), current account with an expected negative sign (Emin and Aytac, 2016; Peltonen, 2006) and the US interest rate with an expected positive sign (Feridun, 2004; Flood et al , 2010).…”

Section: Datamentioning

confidence: 99%

Identifying currency crises indicators: the case of Egypt

Adams

Metwally

2019

AJEMS

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Purpose The purpose of this paper is to identify the indicators of currency crises in Egypt. Using the annual data over the period 1977–2017, the paper attempts to establish which economic variable(s) are more useful in predicting currency crises and to improve the predictability of such crises. Design/methodology/approach Probit analysis is employed to identify the indicators that are most effective in predicting the probability that a currency crisis episode will occur. This is enabled through the estimation of a market turbulence index (MTI) which measures currency crises in terms of eight “threshold” points at which a crisis is detected or not detected. Findings The estimates of the probit model suggest that five variables: the domestic interest rate spread; domestic current account; USA interest rate; real exchange rate; and the real interest rate have the strongest predictive power among the 16 indicators identified in the empirical literature. Research limitations/implications There are a number of limitations associated with this paper. First the data are annual and not monthly which limits the ability of the estimated model to accurately predict the crisis episodes. There is limited open access to monthly data on the Central Bank of Egypt website especially for the period before the 2000s. Were such data available this would allow for much more robust in-sample and out of sample forecasts. Practical implications The analysis and results in the paper suggest that the modelling strategy employed represents a potentially useful tool for Central Banks and policy makers in forecasting currency crises. Social implications There are several such implications but mainly in relation to the possibility of avoiding high social costs resulting from a currency crisis that may have been avoided if forecast correctly. Originality/value The paper builds on previous theoretical and empirical work in this field while adding to the literature in terms of the problems in previous literature and modelling approaches. It also strongly advocates the use of the MTI instead of other indices to identify such crises.

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Section: Datamentioning

confidence: 99%

Identifying currency crises indicators: the case of Egypt

Adams

Metwally

2019

AJEMS

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“…See for example, Schmidt and Zwick (2015), Ghosh et al (2014) and Fratzscher (2011). 28 See, for example, Joyce andNabar (2009), Furceri, Guichard andRusticelli (2012), and Zhao et al (2014).…”

Section: The Consequences Of Sudden Stopsmentioning

confidence: 99%

International Capital Flow Reversals

Cavallo¹

2019

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work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose, as provided below. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license. Abstract *Sudden stops in capital flows are a form of financial whiplash that creates instability in the affected economies. The spark that ignites sudden stops originates in the supply of foreign financing that can halt for reasons that may be unrelated to the affected country's domestic conditions. Yet a spark cannot generate a fire unless combustible materials are available. Those materials are the domestic macroeconomic fundamentals that make some countries more vulnerable than others. Higher fiscal deficits, larger current account deficits, and higher levels of foreign currency debts in the domestic financial system are manifestations of weak fundamentals that increase vulnerability. On the flip side, international reserves provide buffers that can help countries offset the risks. While it may be impossible for countries to completely insulate themselves from the volatility of capital flows, the choice of antidotes to prevent that volatility from forcing potentially costly external adjustments is in their own hands. JEL classifications: F30, F32, F40

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“…Studies have used a probit model to estimate the probability of currency crises or currency crashes (Eichengreen et al 1996: Frankel andBerg and Pattillo 1999;Kruger et al 2000;Komulainen and Lukkarila 2003;Frankel 2005;Licchetta 2011;Furceri et al 2012;Zhao et al 2014). 6 Before examining the empirical literature, it is worth distinguishing between "currency crises" and "currency crashes" because these are two different concepts that are frequently confused.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Moreover, according to the probit estimation results presented by Furceri et al (2012), international reserves and short-term interest rates are relevant for the probability of currency crashes. Zhao et al (2014) found that real exchange rate overvaluation and international reserves are important determinants of currency crashes for fixed exchange rate regimes, whereas credit growth is important for floating regimes.…”

Section: Literature Reviewmentioning

confidence: 99%

Real and financial shocks, exchange rate regimes and the probability of a currency crisis

Nakatani

2018

Journal of Policy Modeling

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We analyze the relationships among shocks, exchange rate regimes, and capital controls in relation to the probabilities of currency crises. Based on the theoretical model by Nakatani (2016Nakatani ( , 2017a, we use panel data on 34 developing countries and apply a probit estimation. We find that both productivity shocks and country risk premium shocks trigger currency crises, whereas productivity shocks are important for severe currency crises. We also find that the effects of these shocks on the probability of a crisis are larger for floating exchange rate regimes and that capital controls mitigate the effects of productivity shocks in pegged regimes.

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Leading Indicators of Currency Crises: Are They the Same in Different Exchange Rate Regimes?

Cited by 11 publications

References 59 publications

Identifying currency crises indicators: the case of Egypt

Identifying currency crises indicators: the case of Egypt

International Capital Flow Reversals

Real and financial shocks, exchange rate regimes and the probability of a currency crisis

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