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Common Determinants Of Currency Crises: Role Of External Balance Sheet Variables

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Executive Summary

This paper investigates the role of external balance sheet variables as determinants of currency crises in Emerging Market (EME) and advanced economies. A random effect probit model is used in a panel of 40 countries with monthly data over the January 1980 - December 2004 period. The main results of the paper are as follows. First, size and, particularly, the composition of a country's external balance sheet are found to play an important role in the onset of crises. Second, EMEs seem to be more sensitive to external balance sheet variables than developed countries, and so too do economies with fixed or quasi-fixed exchange rate regimes. Third, further support is provided to standard theoretical explanations of currency crises.

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