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A regime-switching approach to the study of speculative attacks: A focus on EMS crises

Author

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  • Maria Soledad Martinez Peria

    (The World Bank, 1818 H St., N.W., Room MC 3-451, Washington D.C. 20433)

Abstract

This paper implements a regime-switching framework to study speculative attacks against EMS currencies during 1979-1993. To identify speculative episodes, we model exchange rates, reserves, and interest rates as time series subject to discrete regime shifts between two possible states: "tranquil" and "speculative". We allow the probabilities of switching between states to be a function of fundamentals and expectations. The regime-switching framework improves the ability to identify speculative attacks vis-à-vis the indices of speculative pressure used in the literature. The results also indicate that fundamentals (particularly budget deficits) and expectations drive the probability of switching to a speculative state.

Suggested Citation

  • Maria Soledad Martinez Peria, 2002. "A regime-switching approach to the study of speculative attacks: A focus on EMS crises," Empirical Economics, Springer, vol. 27(2), pages 299-334.
    • Handle: RePEc:spr:empeco:v:27:y:2002:i:2:p:299-334
    Note: Received: October 2000/Final Version Received: June 2001
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