Explaining Currency Crises

John F. Kennedy Faculty Research WP Series R98-07

43 Pages Posted: 25 Aug 1998

See all articles by Gerardo Esquivel

Gerardo Esquivel

El Colegio de Mexico - Centro de Estudios Economicos

Felipe Larrain

Pontificia Universidad Catolica de Chile

Date Written: June 1998

Abstract

This paper examines the determinants of currency crises with a panel annual dataset for 30 countries between 1975 and 1996. We estimate a probit model with random effects and find that high rates of seignorage, current account imbalances, real exchange rate misalignment, low foreign exchange reserves, negative terms of trade shocks, poor growth performance, and a measure of regional contagion all have significant power to explain the presence of currency crises in our sample. In general, our results can be interpreted as supporting both first and second-generation models of currency crises. Various robustness tests confirm the validity of these results. We also find that currency crises have an important predictable component. Using our benchmark regression we are able to predict correctly a majority of the currency crises that occurred within our sample.

JEL Classification: F31, F33

Suggested Citation

Esquivel, Gerardo and Larrain, Felipe, Explaining Currency Crises (June 1998). John F. Kennedy Faculty Research WP Series R98-07, Available at SSRN: https://ssrn.com/abstract=107725 or http://dx.doi.org/10.2139/ssrn.107725

Gerardo Esquivel (Contact Author)

El Colegio de Mexico - Centro de Estudios Economicos ( email )

Camino al Ajusco 20
Col. Pedregal de Santa Teresa
Mexico DF 10740
Mexico
+52 55 5449-3000 x50031 (Phone)
+52 55 5645-0464 (Fax)

Felipe Larrain

Pontificia Universidad Catolica de Chile ( email )

Av. Vicuna Mackenna 4860
Macul. Correo 17
Santiago
Chile
56 2 354-4027 (Phone)
56 2 553-2377 (Fax)

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