Real and Financial Shocks, Exchange Rate Regimes and the Probability of a Currency Crisis

Nakatani, Ryota (2017): Real and Financial Shocks, Exchange Rate Regimes and the Probability of a Currency Crisis.

Abstract

We analyze the relationships among shocks, exchange rate regimes, and capital controls in relation to the probabilities of currency crises. Based on the theoretical model by Nakatani (2016, 2017a), we use panel data on 34 developing countries and apply a probit estimation. We find that both productivity shocks and country risk premium shocks trigger currency crises, whereas productivity shocks are important for severe currency crises. We also find that the effects of these shocks on the probability of a crisis are larger for floating exchange rate regimes and that capital controls mitigate the effects of productivity shocks in pegged regimes.

• Item Type: MPRA Paper
• Language: English
• Keywords: Currency Crisis; Productivity Shock; Risk Premium Shock; Exchange Rate Regimes; Capital Control; Probit Model
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; F - International Economics > F3 - International Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; G - Financial Economics > G0 - General > G01 - Financial Crises

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