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Crises and Credibility in a Target Zone: A Logit from a Markov-Switching Model

M. Isabel Campos and María Araceli Rodríguez ()
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M. Isabel Campos: University of Valladolid

No 00-05, Working Papers from Asociación Española de Economía y Finanzas Internacionales

Abstract: The 90’s could be characterized as a time in which both developed and emerging countries have su¤ered important episodes of exchange rate instability; some of these periods have resulted in exchange rate devaluations and others, in important exchange rate depreciations. We are interested in the knowledge and explanation of such moments of turbulence in order to avoid or even forecast future crises. This paper focuses on the study of the di¤erent moments of speculative pressure in Europe and particularly on the Spanish peseta during the target zone period. We use a Binary Dependent Variable Model (Logit Method) to estimate the readjustment probability in a target zone. Our dependent variable is calculated from a Markov-Switching model on the Spanish-German interest rate di¤erential. We show that this methodology is appropriate.

Keywords: Target Zones; Markov-Switching Models; Currency Crises; Readjustment Probability (search for similar items in EconPapers)
JEL-codes: F3 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2000-09
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