Evaluating Currency Crises: The Case of the European Monetary System

Empirical Economics, Vol. 35, No. 1, pp. 11-27, August 2008

Posted: 16 May 2009

See all articles by Kostas Mouratidis

Kostas Mouratidis

Swansea University

Nicola Spagnolo

Brunel University London - Economics and Finance

Andrea Cipollini

University of Palermo - d/SEAS; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Date Written: August 1, 2008

Abstract

In this paper we examine the nature of currency crises. We ascertain whether the currency crises of the European Monetary System (EMS) were based either on fundamentals, or on self-fulfilling market expectations driven by extrinsic uncertainty. In particular, we extend previous work of Jeanne and Masson (J Int Econ 50:327-350, 2000) regarding the evaluation of currency crisis. We contribute to the existing literature proposing the use of Markov regime-switching with time-varying transition probability model. Our empirical results suggest that the currency crises of the EMS were not due only to market expectations driven by external uncertainty, or 'sunspots', but also to fundamental variables that help to explain the behavior of market expectations.

Suggested Citation

Mouratidis, Kostas and Spagnolo, Nicola and Cipollini, Andrea, Evaluating Currency Crises: The Case of the European Monetary System (August 1, 2008). Empirical Economics, Vol. 35, No. 1, pp. 11-27, August 2008. Available at SSRN: https://ssrn.com/abstract=1405817

Kostas Mouratidis

Swansea University ( email )

Singleton Park
Swansea, SA2 8PP
United Kingdom

Nicola Spagnolo

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom

Andrea Cipollini (Contact Author)

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

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