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Fundamental pitfalls of exchange market pressure-based approaches to identification of currency crises

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  • Pontines, Victor
  • Siregar, Reza

Abstract

This study seeks to demonstrate that the identification of crisis episodes based on commonly applied exchange market pressure (EMP) indices, namely, Eichengreen, Rose and Wyplosz [Eichengreen, B., Rose, A., and Wyplosz, C., 1995, Exchange Market Mayhem: The Antecedents and Aftermaths of Speculative Attacks, Economic Policy 21 (October), 249-312.], Sachs, Tornell and Velasco [Sachs, J.D., Tornel, A., and Velasco, A., 1996, Financial Crises in Emerging Markets: The Lessons From 1995, Brooking Papers on Economic Activity 1, 147-215.], and Kaminsky, Lizondo and Reinhart [Kaminsky, G., Lizondo, S., and Reinhart, C., 1998, Leading Indicators of Currency Crises, IMF Staff Paper 45, 1 (March), 1-48.] are highly sensitive to the choice of: a) the weighting scheme for each component of the EMP index; and b) the statistical parametric assumption used in the constructions of crisis thresholds. To highlight further some of the potential consequences of these two pitfalls in identifying crisis episodes, this paper employs a number of possible alternative approaches to measure the exchange market pressure.

Suggested Citation

  • Pontines, Victor & Siregar, Reza, 2008. "Fundamental pitfalls of exchange market pressure-based approaches to identification of currency crises," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 345-365.
    • Handle: RePEc:eee:reveco:v:17:y:2008:i:3:p:345-365
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    References listed on IDEAS

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    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    2. repec:bla:scandj:v:98:y:1996:i:4:p:463-84 is not listed on IDEAS
    3. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    4. Ramon Moreno, 1995. "Macroeconomic behavior during periods of speculative pressure or realignment: evidence from Pacific Basin economies," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
    5. Morris Goldstein & Graciela Kaminsky & Carmen Reinhart, 2017. "Methodology and Empirical Results," World Scientific Book Chapters, in: TRADE CURRENCIES AND FINANCE, chapter 11, pages 397-436, World Scientific Publishing Co. Pte. Ltd..
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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