A regime-switching approach to the study of speculative attacks: A focus on EMS crises

Maria Martinez Peria

Empirical Economics, 2002, vol. 27, issue 2, 299-334

Abstract: This paper implements a regime-switching framework to study speculative attacks against EMS currencies during 1979-1993. To identify speculative episodes, we model exchange rates, reserves, and interest rates as time series subject to discrete regime shifts between two possible states: "tranquil" and "speculative". We allow the probabilities of switching between states to be a function of fundamentals and expectations. The regime-switching framework improves the ability to identify speculative attacks vis-à-vis the indices of speculative pressure used in the literature. The results also indicate that fundamentals (particularly budget deficits) and expectations drive the probability of switching to a speculative state.

Keywords: Exchange rates; speculative attacks; EMS; Markov regime-switching models (search for similar items in EconPapers)
Date: 2002-04-26
Note: Received: October 2000/Final Version Received: June 2001
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Citations: View citations in EconPapers (66)

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