The Role of Politics in Crisis Prediction

Björn Rother

Chapter 4 in The Determinants of Currency Crises, 2009, pp 84-127 from Palgrave Macmillan

Abstract: Abstract Predicting currency crises is difficult. Doing so successfully would imply outperforming well-informed market participants at forecasting sudden shifts in investor confidence, a task in which even professionals, including the big commercial rating agencies and the IMF, often fail.110 The difficulties encountered in explaining such events may be partially linked to the changing nature of the channels through which vulnerabilities build; in the words of Kindleberger (1989), ‘one knows a financial crisis when it happens,’ but it is difficult to generalize about such events given the idiosyncracies involved in each case. Moreover, predictability may be impaired by the endogeneity of the policy responses that are taken in light of mounting crisis risk, and by the potential for sentiment-driven speculative attacks, which may not be associated with any clear pattern in the evolution of a limited set of fundamentals underlying the exchange rate.111

Keywords: Exchange Rate; Central Bank; Real Exchange Rate; Political Factor; Currency Crisis (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-23364-5_4

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DOI: 10.1057/9780230233645_4

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