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Explaining currency crises: a duration model approach

Tudela, Maria Mercedes (2001) Explaining currency crises: a duration model approach. CEPDP, 487. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 0753014467

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Abstract

This paper is an empirical investigation into the duration of exchange rate episodes characterized by the absence of speculative attacks. We estimate a duration model for OECD countries during the 1970-1997 period. Specifically, we use semi-parametric methods to estimate model with unrestricted base-line hazards. The use of duration models allows us to account for duration dependence among the determinants of the likelihood of speculative attacks. We can test if the length of the time already spent on the peg is a determinant of the probability of exit into a currency crisis state. The results indicate, first, that increases in export growth, bank deposits growth and openness predict a decrease in the probability of exit into a currency crises state. Whereas, increases in import growth; claims on government and capital inflows in terms of portfolio investment and appreciated REER, contribute positively to the likelihood of an occurrence of a crisis. And second, the existence of a highly significant negative duration dependence. The highest probability of exit into a currency crash state is given at the initial of the peg, decreasing afterwards. This suggests the existence of a political cost of realignment that changes over the duration of the spell;growing credibility surrounding an exchange-rate-based stabilization program reduce the probability that the peg will be abandoned.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2001 M. M. Tudela
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 487
Date Deposited: 29 Jul 2008 16:25
URL: http://eprints.lse.ac.uk/20133/

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