A regime-switching framework is used to study speculative attacks against European Monetary System currencies during 1979–93.
Peria uses a regime-switching framework to study speculative attacks against European Monetary System (EMS) currencies during 1979–93.
She identifies speculative attacks by modeling exchange rates, reserves, and interest rates as time series subject to discrete regime shifts. She assumes two states: "tranquil" and "speculative."
She models the probabilities of switching between states as a function of fundamentals and expectations. She concludes that:
Given the importance of anticipating and, wherever possible, avoiding crises, it might be useful to conduct forecasting exercises to determine whether the switching framework proposed here can be used to forecast crises in countries outside the sample.
Because currency crises tend to occur simultaneously in two or more countries, it also might be useful to adapt the regime-switching framework to explore the role of contagion in explaining crises.
This paper—a product of Finance, Development Research Group—is part of a larger effort in the group to understand currency crises. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Agnes Yaptenco, room MC3-446, telephone 202-473-8526, fax 202-522-1155, Internet address ayaptenco@worldbank.org. The author may be contacted at mmartinezperia@worldbank.org. (52 pages)
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