Currency Crises and Uncertainty About Fundamentals

46 Pages Posted: 30 Jan 2006

See all articles by Alessandro Prati

Alessandro Prati

International Monetary Fund (IMF) - Research Department, Deceased

Massimo Sbracia

Bank of Italy

Date Written: January 2002

Abstract

This paper studies how uncertainty about fundamentals contributed to currency crises from both a theoretical and an empirical perspective. We find evidence - based on a monthly dataset of Consensus forecasts for six Asian countries in the period January 1995-May 2001 - confirming the theoretical predictions (from both unique- and multiple-equilibria models) that: (i) speculative attacks depend not only on actual and expected fundamentals but also on the variance of speculators` expectations about them; and (ii) the sign of the effect of the variance depends on whether expected fundamentals are good or bad. These results are robust to the definition of exchange rate pressure indices, the estimation sample (precrisis vs. full sample), the method chosen to avoid spurious correlations, and possible time-varying coefficients for the mean, the variance, and the threshold separating good from bad expected fundamentals.

Keywords: Speculative attack, exchange rate crisis, public and private information

JEL Classification: F31, D84, D82

Suggested Citation

Prati, Alessandro and Sbracia, Massimo, Currency Crises and Uncertainty About Fundamentals (January 2002). IMF Working Paper No. 02/3, Available at SSRN: https://ssrn.com/abstract=879309

Alessandro Prati (Contact Author)

International Monetary Fund (IMF) - Research Department, Deceased ( email )

Massimo Sbracia

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 3860 (Phone)
+39 06 4792 4118 (Fax)

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