Prediction of Currency Crises using a Fiscal Sustainability Indicator

Cruz-Rodríguez, Alexis (2011): Prediction of Currency Crises using a Fiscal Sustainability Indicator. Published in: Revista de Análisis Económico , Vol. 26, No. 2 (December 2011): pp. 39-60.

Abstract

The purpose of this paper is to investigate whether a fiscal sustainability indicator (FSI) can be used as a leading indicator to predict currency crises. Firstly, the sustainability of the fiscal policy in 17 developing countries is analysed using a FSI developed by Croce and Juan-Ramón (2003). Then, the FSI is evaluated in order to help predict currency crises. Using a non-linear Markov-switching model, and applying the Gibbs sampling approach, it is found that the FSI influences the probability of entering a currency crisis period. Also, in the absence of official definitions for currency crises, different definitions are used to evaluate whether they induce different results in the analysis. In general, the results highlight how an unsustainable fiscal position leads to the eventual collapse of the exchange rate in some developing countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Currency crisis, foreign exchange, fiscal sustainability
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions

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