A Nonparametric Approach To Predicting International Financial Crises

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Executive Summary

Currency crises seem to come in clusters two or three times a decade (1971, 1973, 1983, 1986, 1992, 1994, and 1997). The "Usual" course for a run on a country's currency occurs when the country tries to maintain a set exchange rate for its currency, usually by intervening in currency markets (the extent to which this actually effects the value of a currency is debated, Sarno and Taylor (2001)) to prop up the value of its currency. If sustained, the country uses ups it foreign currency reserves and has to allow its currency to depreciate, often suddenly, resulting in a crisis (Krugman (1979)).

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