Modelling Currency Crises in Emerging Markets: A Dynamic Probit Model with Unobserved Heterogeneity and Autocorrelated Errors

27 Pages Posted: 27 Jul 2006

See all articles by Elisabetta Falcetti

Elisabetta Falcetti

European Bank for Reconstruction and Development (EBRD)

Merxe Tudela

Bank of England - Market Infrastructure Division

Abstract

The paper investigates the causes of currency crises in emerging markets. We estimate the probability of a currency crisis by applying maximum smoothly simulated likelihood to a dynamic LDV model. This approach allows us to take explicit account of the existence of intertemporal links between crises. The results show that currency crises are influenced by real, monetary, debt and global variables. Past banking crises are significant determinants of the probability of currency crises. Moreover, countries that sharply devalued in the past are less prone to experience another currency crisis. We find evidence of unobserved heterogeneity, which may reflect differences in the countries' institutional/historical background. Finally, the determinants of currency crises differ by type of exchange rate regime.

Suggested Citation

Falcetti, Elisabetta and Tudela, Merxe, Modelling Currency Crises in Emerging Markets: A Dynamic Probit Model with Unobserved Heterogeneity and Autocorrelated Errors. Oxford Bulletin of Economics and Statistics, Vol. 68, No. 4, pp. 445-471, August 2006, Available at SSRN: https://ssrn.com/abstract=920951 or http://dx.doi.org/10.1111/j.1468-0084.2006.00172.x

Elisabetta Falcetti (Contact Author)

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

Merxe Tudela

Bank of England - Market Infrastructure Division ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
+44 (0)207 601 3840 (Phone)

HOME PAGE: www.bankofengland.co.uk

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