Uncertainty and Currency Crises: Evidence from Survey Data

Prati, Alessandro and Sbracia, Massimo (2010): Uncertainty and Currency Crises: Evidence from Survey Data.

Abstract

This paper studies empirically how uncertainty affects speculation in the foreign exchange markets. We use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals. We find that uncertainty has a non-monotone effect on exchange rate pressures: namely, uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad. We prove that this prediction arises from a broad class of currency crisis theories, ranging from first-generation to global-game models. We also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias.

• Item Type: MPRA Paper
• Language: English
• Keywords: First-generation models, Global games, Information, Speculation
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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