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The Role of Politics in Crisis Prediction

In: The Determinants of Currency Crises

Author

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  • Björn Rother

Abstract

Predicting currency crises is difficult. Doing so successfully would imply outperforming well-informed market participants at forecasting sudden shifts in investor confidence, a task in which even professionals, including the big commercial rating agencies and the IMF, often fail.110 The difficulties encountered in explaining such events may be partially linked to the changing nature of the channels through which vulnerabilities build; in the words of Kindleberger (1989), ‘one knows a financial crisis when it happens,’ but it is difficult to generalize about such events given the idiosyncracies involved in each case. Moreover, predictability may be impaired by the endogeneity of the policy responses that are taken in light of mounting crisis risk, and by the potential for sentiment-driven speculative attacks, which may not be associated with any clear pattern in the evolution of a limited set of fundamentals underlying the exchange rate.111

Suggested Citation

  • Björn Rother, 2009. "The Role of Politics in Crisis Prediction," Palgrave Macmillan Books, in: The Determinants of Currency Crises, chapter 4, pages 84-127, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-23364-5_4
    DOI: 10.1057/9780230233645_4
    as

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