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Currency Crises and Uncertainty About Fundamentals

Author/Editor: Prati, Alessandro | Sbracia, M.
Authorized for Distribution: January 1, 2002
Electronic Access: Free Full Text (PDF file size is 2,222KB)
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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.
 
Series: Working Paper No. 02/3
Subject(s): Currencies | Exchange rates | Economic policy | Public information | Economic models
Author's keyword(s): Speculative attack | exchange rate crisis | public and private information
 
English  
    Published:   January 1, 2002        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA0032002   Pages:   46
    Price:   US$15.00
       
     
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