Currency crises, sunspots and Markov-switching regimes

Abstract This paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotic dynamics for the devaluation expectations. We then propose an econometric technique, based on the Markov-switching regimes framework, by which these models can be brought to the data. We illustrate this empirical approach by studying the experience of the French franc between 1987 and 1993, and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots.

[1]  A. Velasco.  Fixed exchange rates: Credibility, flexibility and multiplicity , 1996 .

[2]  Barry Eichengreen,et al.  Currency Crisis and Unemployment: Sterling in 1931 , 1998 .

[3]  Jonathan D. Cryer,et al.  Time Series Analysis , 1986 .

[4]  Paul R. Masson.  Gaining and Losing ERM Credibility: The Case of the United Kingdom , 1995 .

[5]  Kenneth Rogoff,et al.  The Mirage of Fixed Exchange Rates , 1995 .

[6]  A. Rose,et al.  European Exchange Rate Credibility Before the Fall , 1993 .

[7]  James D. Hamilton.  Rational-expectations econometric analysis of changes in regime: An investigation of the term structure of interest rates , 1988 .

[8]  Bruce E. Hansen,et al.  Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis , 1996 .

[9]  Frank Heinemann,et al.  American Economic Association Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks : Comment , 2015 .

[10]  M. Obstfeld.  The Logic of Currency Crises , 1994 .

[11]  Robert P. Flood,et al.  Perspectives on the Recent Currency Crisis Literature , 1998, SSRN Electronic Journal.

[12]  Harold L. Cole,et al.  A self-fulfilling model of Mexico's 1994-95 debt crisis , 1996 .

[13]  O. Jeanne.  Are currency crises self-fulfilling?: A test , 1997 .

[14]  S. V. Norden.  Regime Switching as a Test for Exchange Rate Bubbles , 1996 .

[15]  Barry Eichengreen,et al.  The Unstable EMS , 1993 .

[16]  Simon van Norden,et al.  Regime-Switching Models: A Guide to the Bank of Canada Gauss Procedures , 1996 .

[17]  Peter Isard,et al.  Exchange Rate Economics. , 1996 .

[18]  Paolo A. Pesenti,et al.  Interpreting the ERM Crisis: Country-Specific and Systemic Issues , 1998 .

[19]  Lars E. O. Svensson.  Assessing Target Zone Credibility , 1991 .

[20]  Maria Soledad Martinez Peria.  A regime-switching approach to the study of speculative attacks: A focus on EMS crises , 2002 .

[21]  M. Embrechts,et al.  Exchange Rate Theory: Chaotic Models of Foreign Exchange Markets , 1993 .

[22]  James D. Hamilton.  Time Series Analysis , 1994 .

[23]  P. Krugman.  Are Currency Crises Self-Fulfilling? , 1996, NBER Macroeconomics Annual.

[24]  Carlos Lozada,et al.  European Economic Review: February 1999, Amsterdam , 1999 .

[25]  M. Obstfeld.  Models of Currency Crises with Self-Fulfilling Features , 1995 .

[26]  茂 笹山.  Paul De Grauwe, Hans Dewachter, and Mark Embrechts Exchange Rate Theory: Chaotic Models of Foreign Exchange Markets Blackwell, 1993 , 1995 .

[27]  R. Peruga,et al.  Can a time-varying risk premium explain excess returns in the forward market for foreign exchange? , 1990 .

[28]  Olivier Jeanne,et al.  CURRENCY CRISES: A PERSPECTIVE ON RECENT THEORETICAL DEVELOPMENTS , 1999 .

[29]  James D. Hamilton.  A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle , 1989 .