Currency Crises During the Great Recession: Is this Time Different?

47 Pages Posted: 19 Jul 2011 Last revised: 14 Apr 2013

See all articles by Tiziano Arduini

Tiziano Arduini

University of Bologna-Department of Economics

Giuseppe De Arcangelis

Sapienza Università di Roma

Carlo L. Del Bello

Paris School of Economics (PSE)

Date Written: July 19, 2011

Abstract

During the 2007-2009 financial crisis the foreign exchange market was characterized by large volatility and wide currency swings. In this paper we evaluate whether during the period of the Great Recession there has been a structural break in the relationship between fundamentals and exchange rates within an early-warning framework. This is done by extending the original data set by Kaminsky and Reinhart (1999) and including not only the most recent period, but also 17 new countries. Our analysis considers two variations of the original early-warning system. First, we propose two new methods to obtain the probability distribution of the early-warning indicator (conditional on the occurrence of a crisis) -- one fully parametric and one based on a novel distribution-free semi-parametric approach. Second, we compare the original early-warning indicator with a core indicator that includes only ``pseudo-financial variables'' (domestic credit/GDP, the real exchange rate, international reserves and the real interest-rate differential) and we evaluate their performance not only for currency crises during the Great Recession, but also for the Asian Crisis. All tests make us conclude that ``this time is different'', i.e. early-warning systems based on traditional macroeconomic variables have not only failed to forecast currency crises during the Great Recession, but have also significantly worsened with respect to the period of the Asian crisis.

Keywords: early warning systems, exchange rates, semi-parametric methods

JEL Classification: F31, F47, F30

Suggested Citation

Arduini, Tiziano and De Arcangelis, Giuseppe and Del Bello, Carlo Leone, Currency Crises During the Great Recession: Is this Time Different? (July 19, 2011). Available at SSRN: https://ssrn.com/abstract=1889044 or http://dx.doi.org/10.2139/ssrn.1889044

Tiziano Arduini

University of Bologna-Department of Economics ( email )

Piazzale Scaravilli 2
Bologna, 40126
Italy

HOME PAGE: http://https://sites.google.com/site/tizianoarduini/

Giuseppe De Arcangelis (Contact Author)

Sapienza Università di Roma ( email )

Dipartimento di Scienze Sociali ed Economiche
P.le Aldo Moro 5
Rome, 00185
Italy
+390649910489 (Phone)

HOME PAGE: http://https://sites.google.com/a/uniroma1.it?pli=1

Carlo Leone Del Bello

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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