Evaluating Currency Crises: A Multivariate Markov Regime Switching Approach
25 Pages Posted: 13 Dec 2012
Date Written: January 2013
This paper provides an empirical framework to analyse the nature of currency crises by extending earlier work of Jeanne and Masson (2000; Journal of International Economics, Vol. 50, pp. 327–350). Jeanne and Masson suggest a Markov regime switching models to analyse models of currency crises with multiple equilibria. This paper further contributes to the literature by suggesting a multivariate Markov regime switching model. In the new set‐up, one can test for the impact of the unobserved dynamics of fundamentals on the probability of devaluation.
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