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

See all articles by Jesús Crespo Cuaresma

Jesús Crespo Cuaresma

University of Innsbruck - Department of Economic Theory, Economic Policy and Economic History

Tomas Slacik

Austrian National Bank - Foreign Research Division

Date Written: 2008

Abstract

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

Crespo Cuaresma, Jesús and Slacik, Tomas, On the Determinants of Currency Crises: The Role of Model Uncertainty (2008). University of Innsbruck Working Papers in Economics and Statistics Paper No. 2008-03. Available at SSRN: https://ssrn.com/abstract=1087984 or http://dx.doi.org/10.2139/ssrn.1087984

Jesús Crespo Cuaresma (Contact Author)

University of Innsbruck - Department of Economic Theory, Economic Policy and Economic History ( email )

Universitaetsstrasse 15
Innsbruck, A - 6020
Austria

Tomas Slacik

Austrian National Bank - Foreign Research Division ( email )

Otto-Wagner-Platz 3
Vienna, A-1011
Austria

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