Evaluating currency crises: the case of the European monetary system |
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Authors: | Andrea Cipollini Kostas Mouratidis Nicola Spagnolo |
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Institution: | (1) Department of Economics, University of Essex, Essex, UK;(2) School of Business and Economics, University of Wales, Swansea, UK;(3) Department of Economics and Finance, Brunel University, London, UK |
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Abstract: | In this paper we examine the nature of currency crises. We ascertain whether the currency crises of the European Monetary
System (EMS) were based either on fundamentals, or on self-fulfilling market expectations driven by extrinsic uncertainty.
In particular, we extend previous work of Jeanne and Masson (J Int Econ 50:327–350, 2000) regarding the evaluation of currency
crisis. We contribute to the existing literature proposing the use of Markov regime-switching with time-varying transition
probability model. Our empirical results suggest that the currency crises of the EMS were not due only to market expectations
driven by external uncertainty, or ‘sunspots’, but also to fundamental variables that help to explain the behavior of market
expectations.
We would like to thank Joseph Byrne, James Mitchell, Martin Weale and two anonymous referees for very useful comments and
suggestions. |
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Keywords: | Currency crises Multiple equilibria Markov-switching |
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