On the Determinants of Currency Crises: The Role of Model Uncertainty
University of Innsbruck Working Papers in Economics and Statistics Paper No. 2008-03
30 Pages Posted: 28 Jan 2008
Date Written: 2008
We tackle explicitly the issue of model uncertainty in the framework of binary variable models of currency crises. Using Bayesian model averaging techniques, we assess the robustness of the explanatory variables proposed in the recent literature for both static and dynamic models. Our results indicate that the variables belonging to the set of macroeconomic fundamentals proposed by the literature are very fragile determinants of the occurrence of currency crises. The results improve if the crisis index identifies a crisis period (defined as the period up to a year before a crisis) instead of a crisis occurrence. In this setting, the extent of real exchange rate misalignment and financial market indicators appear as robust determinants of crisis periods.
Keywords: Forecasting, model averaging, Bayesian econometrics, exchange rates
JEL Classification: F31, F34, E43
Suggested Citation: Suggested Citation