Are Currency Crises Predictable?

European Economic Review, April 1998

Posted: 18 Jun 1998

See all articles by Ilan Goldfajn

Ilan Goldfajn

Gávea Investimentos; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Central Bank of Brazil

Rodrigo Valdés

Central Bank of Chile; Ministry of Finance, Chile

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Abstract

Note: Below is a description of the paper and not the actual abstract.

This paper studies whether exchange rate expectations and overvaluations are predictors of currency crises using survey data for 26 countries in the last 13 years. The results suggest that overvaluation has predictive power in explaining crises since it shows that real exchange rate misaligment is a good predictor even out-of-sample (i.e., using only past information to predict crises). Independently of the possible role of the real exchange rate, expectations should incorporate all information available, including other leading indicators, when predicting crises. However, the results show that expectations cannot predict crises. Therefore, from the perspective adopted in this paper, exchange rate crises are largely unpredictable events.

JEL Classification: F31, F33

Suggested Citation

Goldfajn, Ilan and Valdés, Rodrigo O., Are Currency Crises Predictable?. European Economic Review, April 1998. Available at SSRN: https://ssrn.com/abstract=99448

Ilan Goldfajn (Contact Author)

Gávea Investimentos ( email )

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22431-050 Rio de Janeiro
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Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

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Rio de Janeiro, RJ 22453
Brazil

Central Bank of Brazil ( email )

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Rodrigo O. Valdés

Central Bank of Chile ( email )

Agustinas 1180
Research Department
Santiago
Chile
+56 2 670 2000 (Phone)
+56 2 670 2231 (Fax)

Ministry of Finance, Chile

Teatinos 120
Santiago, 8340487
Chile

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