A regime-switching approach to the study of speculative attacks: A focus on EMS crises |
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Authors: | Maria Soledad Martinez Peria |
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Institution: | (1) The World Bank, 1818 H St., N.W., Room MC 3-451, Washington D.C. 20433 (e-mail: mmartinezperia@worldbank.org), US |
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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.
First Version Received: October 2000/Final Version Received: June 2001 |
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Keywords: | : Exchange rates speculative attacks EMS Markov regime-switching models |
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