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Speculative Currency Attacks: Role of Inconsistent Macroeconomic Policies and Real Exchange Rate Overvaluation

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  • Alfredo Pistelli

Abstract

This paper provides a critical analysis of Kaminsky and Reinhart (1999) (KR), perhaps the most prominent empirical paper on causes of currency crises. After dealing with problems present in this paper, it proposes an aggregate leading indicator of crisis. The proposed indicator performs better than a composite index based on the best six individual indicators of KR, both in terms of accuracy and predictive capacity, and represents a unified version of the currency crises approach that emphasizes the role of inconsistent macroeconomic policies as an explanation of currency crises, and the approach that emphasizes the role of tradeoffs among policymakers decisions as the main cause of these crises. Variables included in the proposed leading indicator are: the deviation of the actual stock of international reserves from an estimated demand for international reserves; the real growth of domestic credit; the ratio of domestic credit to M2; and the behavior of both the real exchange rate and industrial production as a measure of overvaluation of the real exchange rate.

Suggested Citation

  • Alfredo Pistelli, 2006. "Speculative Currency Attacks: Role of Inconsistent Macroeconomic Policies and Real Exchange Rate Overvaluation," Working Papers Central Bank of Chile 379, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:379
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    References listed on IDEAS

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    1. Andrew Berg & Catherine Pattillo, 1999. "Are Currency Crises Predictable? A Test," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1-1.
    2. 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.
    3. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-166, February.
    4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
    5. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
    6. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
    7. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    8. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 1-5.
    9. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    10. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    11. Graciela L. Kaminsky, 2003. "Varieties of Currency Crises," NBER Working Papers 10193, National Bureau of Economic Research, Inc.
    12. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
    13. Amartya Lahiri & Carlos A. Vegh, 2000. "Delaying the Inevitable: Optimal Interest Rate Policy and BOP Crises," NBER Working Papers 7734, National Bureau of Economic Research, Inc.
    14. Wildo González P. & Alfredo Pistelli M., 2007. "Estimación de la Probabilidad de Recesión en Estados Unidos," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 10(3), pages 129-136, December.
    15. Amartya Lahiri & Carlos A. Vegh, 2003. "Delaying the Inevitable: Interest Rate Defense and Balance of Payments Crises," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 404-424, April.
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    Cited by:

    1. Teuta Ismaili Muharremi, 2015. "Currency Crisis Revisited: A Literature Review," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(6), pages 117-124, December.
    2. Wildo González P. & Alfredo Pistelli M., 2007. "Estimación de la Probabilidad de Recesión en Estados Unidos," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 10(3), pages 129-136, December.
    3. Ayala, Alfonso, 2011. "Un modelo de predicción de crisis financieras en los mercados emergentes: 1970 – 2009 [A Prediction Model of Financial Crises in Emerging Markets: 1970 - 2009]," MPRA Paper 42403, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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