Fundamentals, Contagion and Currency Crises: An Empirical Analysis

Mark Kruger (), Patrick Osakwe and Jennifer Page

Staff Working Papers from Bank of Canada

Abstract: This paper examines the determinants of currency crises in Latin America, Asia and Africa. It asks two basic questions: (a) Are currency crises linked to economic fundamentals? and; (b) Is there any evidence of a contagion effect after controlling for the potential effects of economic fundamentals? Using pooled annual data for 19 developing countries spanning the period 1977-1993, we argue that among the macroeconomic variables considered as causes of currency crises, a measure of lending booms, real exchange rate misalignment and the ratio of M2 to international reserves are the only variables that can be consistently linked to currency crises. Economic fundamentals such as the growth rate of domestic credit and high fiscal and current account deficits are generally not significant. In cases where a significant relationship is found, the result is not robust in the sense that the relationship becomes insignificant when there is either a change in the sample size or the definition of the crisis index. Our paper also provides empirical evidence in support of the idea that currency crises could be contagious. The results from our study suggest that currency crises cannot be explained solely by looking at economic fundamentals and that regional contagion effects as well as the speculative behaviour of investors may be important determinants.

Keywords: Exchange; rates (search for similar items in EconPapers)
JEL-codes: F3 (search for similar items in EconPapers)
Pages: 36pages
Date: 1998
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Citations: View citations in EconPapers (57)

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Journal Article: Fundamentals, Contagion and Currency Crises: An Empirical Analysis (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:98-10

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