The Relationship between Fiscal Sustainability and Currency Crises in Some Selected Countries

Issue: 4/2013

Alexis Cruz-Rodríguez

Pontificia Universidad Católica Madre y Maestra, Av. Abraham Lincoln Esq. Rómulo Betancourt, Ensanche La Julia, Santo Domingo, Dominican Republic, Email: alexiscruz@pucmm.edu.do

The aim of this article is to assess whether a Fiscal Sustainability Indicator (FSI) can be used to predict the probability that a currency crisis occurs. The FSI developed by Croce and Juan-Ramón (2003) is employed. Two different definitions for currency crises are used to evaluate whether they induce different results in the analysis. In general, the results suggest that the lagged FSI has an explanatory power over currency crises in some countries.

Pages: 
175–194
DOI: 10.2478/revecp-2013-0008
JEL: F33, F31, E62
Keywords: probit model, foreign exchange, fiscal sustainability, Currency crises
References: 

 

AZIZ,  J., CARAMAZZA, F., SALGADO, R. (2000). Currency crises: In search of common elements. Working Paper WP/00/67, International Monetary Fund.

BERG, A., PATTILLO, C. (1999a). Are currency crises predictable? A test. IMF Staff Papers.46(2).Pp.107-138.

BERG, A., PATTILLO, C. (1999b). Predicting currency crises: The indicators approach and an alternative. Journal of International Money and Finance. 18(4). Pp.561-586. DOI: 10.1016/S0261-5606(99)00024-8

BROOME, S., MORLEY, B. (2004). Stock prices as a leading indicator of the East Asian financial crisis. Journal of Asian Economics, 15. Pp. 189-197. DOI: 10.1016/j.asieco.2003.12.008

BURKART, O., COUDERT, V. (2002). Leading indicators of currency crises for emerging countries. Emerging Markets Review, 3. Pp. 107-133. DOI: 10.1016/S1566-0141(02)00002-X

CHANG, R., VELASCO, A. (2001). A model of financial crises in emerging markets. Quarterly Journal of Economics, 116(2). Pp.489-514. DOI: 10.1162/00335530151144087

COMELLI, F. (2013). Comparing parametric and non-parametric early warning systems for currency crises in emerging market economies. Working Paper WP/13/124, International Monetary Fund.

CREPO-CUARESMA, J., SLACIK, T. (2007). Predicting currency crises using the term structure of relative interest rates: Case studies of the Czech Republic and Russia. Focus on European Economic Integration, Issue 1. Pp. 135-149.

CREPO-CUARESMA,  J., SLACIK, T. (2009). On determinants of currency crises: The role of model uncertainty. Journal of Macroeconomics, 31(4). Pp. 621-632. DOI: 10.1016/j.jmacro.2009.01.004

CROCE, E., JUAN-RAMÓN, V. H. (2003). Assessing fiscal sustainability: A cross-country comparison. Working Paper WP/03/145, International Monetary Fund.

EICHENGREEN, B., ROSE, A. K., WYPLOSZ, C. (1994). Speculative attacks on pegged exchange rates: An empirical exploration with special reference to the European Monetary System. Working Paper 4898, National Bureau of Economics Research.

EICHENGREEN, B., ROSE, A. K., WYPLOSZ, C. (1996). Contagious currency crises: First tests. Scandinavian Journal of Economics, 98. Pp. 463-484. DOI: 10.2307/3440879

ESTRELLA, A. (1998). A new measure of fit for equations with dichotomous dependent variables. Journal of Business & Economic Statistics, 16(2). Pp. 198-205.

FLOOD, R., GARBER, P. (1984). Collapsing exchange rate regimes: Some linear examples. Journal of International Economics, 17. Pp.1-13. DOI: 10.1016/0022-1996(84)90002-3

FLOOD, R. and MARION, N. (1996). Speculative attacks: Fundamentals and self-fulfilling prophecies. Working Paper 5789, National Bureau of Economic Research.

FRANKEL, J. A., ROSE, A. K. (1996). Currency crashes in emerging markets: An empirical treatment. Journal of International Economics, 41. Pp. 351-366. DOI: 10.1016/S0022-1996(96)01441-9

FRANKEL, J. A., SARAVELO, G. (2012). Can leading indicators assess country vulnerability? Evidence from 2008-09 global financial crisis. Journal of International Economics, 87(2). Pp. 216-231. DOI: 10.1016/S0022-1996(96)01441-9

GIRTON, L., ROPER, D. (1977). A monetary model of exchange market pressure applied to the post-war Canadian experience. American Economic Review, 67. Pp. 537-548.

GOLDFAJN, I., VALDÉS, R. O. (1998). Are currency crises predictable? European Economic Review, 42. Pp. 873-885.

GOLDSTEIN, M., KAMINSKY, G., REINHART, C. M. (2000). Assessing Financial Vulnerability: An Early Warning System for Emerging Markets. Institute for International Economics. Washington, DC. DOI: 10.1016/S0014-2921(97)00126-8

KAMINSKY, G., LIZONDO, S., REINHART, C. (1998). Leading indicators of currency crises. Staff Papers.45(1).Pp.1-48.

KAMINSKY, G., REINHART, C. (1999). The twin crises: The causes of banking and balance of payments problems. American Economic Review, 89(3). Pp.473-500. DOI: 10.1257/aer.89.3.473

KRUGMAN, P. (1979). A model of balance of payments crises. Journal of Money, Credit and Banking, 11. Pp.311-325. DOI: 10.2307/1991793

KRUGMAN, P. (1996). Are currency crises self-fulfilling? In NBER Macroeconomic Annual (2). Pp.345-378. DOI: 10.2307/3585207

KUMAR, M., MOORTHY, U., PERRAUDIN, W. (2003). Predicting emerging market currency crashes. Journal of Empirical Finance, 10(4). Pp.427-454. DOI: 10.1016/S0927-5398(02)00068-3

OBSTFELD, M. (1986). Rational and self-fulfilling balance of payments crises. American Economic Review, 76.Pp.72-81.

OBSTFELD, M. (1996). Models of currency crises with self-fulfilling features. European Economic Review, 40. Pp.1037-1048. DOI: 10.1016/0014-2921(95)00111-5

RANGVID, J. (2001). Second generation models of currency crises. Journal of Economic Survey, 15(5). Pp.613-641. DOI: 10.1111/1467-6419.00151

SY, A. N. (2004). Rating the rating agencies: Anticipating currency crises or debt crises? Journal of Banking & Finance, 28. Pp. 2845-2867. DOI: 10.1016/j.jbankfin.2004.06.012

VEAL, M. R., ZIMMERMAN, K. F. (1992). Pseudo-R2’s in the ordinal probit model. Journal of Mathematical Sociology. 16. Pp.333-342. DOI: 10.1080/0022250X.1992.9990094