Explaining Currency Crises: A Duration Model Approach

Merxe Tudela

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper is an empirical investigation into the duration of exchange rate episodes characterized by the absence of speculative attacks. We estimate a duration model for OECD countries during the 1970-1997 period. Specifically, we use semi-parametric methods to estimate model with unrestricted base-line hazards. The use of duration models allows us to account for duration dependence among the determinants of the likelihood of speculative attacks. We can test if the length of the time already spent on the peg is a determinant of the probability of exit into a currency crisis state. The results indicate, first, that increases in export growth, bank deposits growth and openness predict a decrease in the probability of exit into a currency crises state. Whereas, increases in import growth; claims on government and capital inflows in terms of portfolio investment and appreciated REER, contribute positively to the likelihood of an occurrence of a crisis. And second, the existence of a highly significant negative duration dependence. The highest probability of exit into a currency crash state is given at the initial of the peg, decreasing afterwards. This suggests the existence of a political cost of realignment that changes over the duration of the spell;growing credibility surrounding an exchange-rate-based stabilization program reduce the probability that the peg will be abandoned.

Keywords: Currency crises; speculative attacks; exchange rates; hazard functions; duration models (search for similar items in EconPapers)
Date: 2001-01
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Citations: View citations in EconPapers (9)

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Journal Article: Explaining currency crises: a duration model approach (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp0487

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