The evidence is broadly supportive of an asset view of speculative attacks and the importance of the variance of monetary aggregates in predicting currency crises, but it cast some doubt on existing theories.
The literature on speculative attacks has been given new impetus by the collapse of the European currency arrangements beginning in 1992, by the Mexican peso crisis and after-effects in 1994, and most recently by speculative attacks across Asia.
One strand of this literature stresses the importance of imbalances in stocks of monetary and financial aggregates rather than traditional "flow" factors, arguing that massive, volatile capital flows have become a dominant feature of the global landscape, and that exchange-rate levels and current accounts have not proved convincing as proximate causes of crises.
Galindo and Maloney test two popular asset-based models of speculative attacks—Krugman and Rotemberg (1992) and Calvo and Mendoza (1995)—especially their emphasis on the second moments of monetary aggregates.
Analyzing monthly panels of appropriate countries in three regions, they find evidence for the importance of money/reserve ratios predicted by both models, and their variance as predicted by Calvo and Mendoza.
But the variance of velocity does not appear to be important, casting some doubt on the Krugman-Rotemberg target zone framework and the interpretation of the Calvo-Mendoza results.
This paper—a product of the Poverty and Economic Management Unit of the Latin America and the Caribbean Region—is part of a larger effort in the region to understand the determinants of macroeconomic instability. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Marta Cervantes, room I8-095, telephone 202-473-7794, fax 202-522-0054, Internet address mcervantes@worldbank.org. William Maloney may be contacted at wmaloney@worldbank.org. (27 pages)
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