Determinants of Exchange Market Pressures in Different Exchange Rate Regimes: Bayesian Model Averaging Evidence

Document Type : Research Paper

Authors

1 Ph.D. Candidate in Economics, University of Tabriz

2 Professor of Economics, University of Tabriz

3 Associate Professor of Economics, University of Tabriz

Abstract

The purpose of this paper is to determine the most significant leading indicators of the currency crisis in two groups of countries, countries with the floating exchange rate regimes and countries with the non-floating ones. A unique set data that covers 43 countries and their currency crises during 1999-2014 and 64 indicators are used. Moreover, estimation technique that is robust to model uncertainty, i.e. Bayesian Model Averaging is applied. Two types of the warning systems are used. Therefore, in the first system, warning variables of currency crisis are investigated while in the second ones, determinants of the exchange market pressure volatility are examined. Morever, these systems involve monitoring the evaluation of several leading indicators from the financial, political, structural, trade and other sectors. Overall, the results indicate that Oil price plays a pivotal role as a warning variable in countries with floating exchange rate regimes in both systems. Just the same, for the countries that experienced non-floating exchange rate regime prior to the crisis and during of it, changes in exchange market pressure index is a significant leading indicator of currency crises.

Keywords

Main Subjects

References

  1. Aizenman, J., Chinn, M.D., Ito, H. (2008). Assessing the emerging global financial architecture: Measuring the Trilemma’s configurations over time. NBER working papers, No. 14533. National Bureau of Economic Research, Inc.
  2. Aizenman, J., Hutchison, M.M. (2012). Exchange market pressure and absorption by international reserves: emerging markets and fear of reserve loss during the 2008–2009 crisis. Journal of International Money and Finance. 31 (5), 1076–1091.
  3. Akerlof, G. and Romer, P. (1994). Looting the economic underworld of bankruptcy for profit, NBER working paper, No. 1869.
  4. Baig T. and Goldfajn I. (1999). Financial market contagion in the Asian crisis. IMF staff papers, 46(2), 167-95.
  5. Blanchard,O. and Watson, M.W. (1982). Bubbles, rational expectations, and financial markets, in P. Wachtel (ed.). Crisis in the economicand financial structure (Cambridge, MA:Lexington books).
  6. Burnside,C., Eichenbaum. M. and Rebelo, S. (2001). Prospective deficits and the Asian crisis. Journal of Political Economy, 109(6), 1155-1197.
  7. Bussiere, M. and M. Fratzschere (2006). Toward a new system of financial crisis. Journal of International Money and Finance, 25(6), 953-973.
  8. Calvo. G. (1996). Capital inflows and macroeconomic management: Tequila lessons. International Journal of Finance and Economics, Vol. 1,  207-23.
  9. Corsetti G., Pesenti, P. and Roubini. N. (1999).  Paper tigers: A model of the Asian crisis. European Economic Review, Vol. 43., 1211-1236.
  10. Davis, Philip E., Dilruba Karim  (2007). Comparing early warning systems for banking crises. Journal of Financial Stability, Vol. 4, 89-120.
  11. Durlauf, S., Kourtellos, A., Tan, C. (2008). Are any growth theories robust?. The Economic Journal, 118 (527), 329–346.
  12. Edison, H., Fernald. J. and Loungani, P. (1997). Was China the first domino? Assessing links between China and the rest of emerging Asia. Journal of International Money and Finance, Vol. 18, 515-35.
  13. Edison, H.J. (2000). Do indicator of financial crises work? An evaluation of an early warning system. International Discussion Papers, No. 675, Board of governors of federal reserve system, Washington D. C., 1-76.
  14. Eichengreen, B., Rose, A. K. and Wyplosz, C. (1995). Exchange market mayhem: The antecedents and aftermath of speculative attacks. Economic Policy, Vol. 21, 249-312.
  15. Eicher, T.S., Papageorgiou, C., Raftery, A.E. (2011). Default priors and predictive performance in Bayesian model averaging, with application to growth determinants. Journal of Applied Econometrics,  26 (1), 30–55.
  16. Feldkircher Martin, Roman Horvath, Marek Rusnak. (2014). Exchange market pressures during the financial crisis: A Baysian model averaging evidence. Journal of International Money and Finance, Vol. 40, 21-41.
  17. Feldkircher, M., Zeugner, S. (2009). Benchmark priors revisited: On adaptive shrinkage and the supermodel effect in Bayesian model averaging. IMF working papers 09/202. International Monetary Fund.
  18. Feldkircher, M., Zeugner, S. (2012). The impact of data revisions on the robustness of growth determinants–a note on‘de-terminants of economic growth: will data tell?. Journal of  Applied Econometrics,  27 (4), 686–694.
  19. Fernandez, C., Ley, E., Steel, M.F.J. (2001a). Benchmark priors for Bayesian model averaging. Journal of Econometrics, 100 (2), 381–427.
  20. Fernandez, C., Ley, E., Steel, M.F.J. (2001b). Model uncertainty in cross-country growth regressions. Journal of  Applied Economics, 16 (5), 563–576.
  21. Flood, R.P. and Garber,P.M. (1984). Collapsing Exchange Rate Regimes: Some Linear Examples. Journal of International Economics, Vol. 16, 1-13.
  22. Frankel J. A., K. Rose (1996). Currency crashes in Emerging markets: An empirical treatment. Journal of International Economics, Vol. 41, 351-366.
  23. Fratzcher, M. (2003). On currency crises and contagion. Journal of International Money and Finance, Vol. 8,  109-29.
  24. Girton, L., Roper, D. (1977). A monetary model of exchange market pressure applied to the Postwar Canadian experience. The American Economic Review, 67 (4), 537–548.
  25. Holtemoller Oliver, Sushanta Mallick (2013). Exchange rate regime, real misalignment and currency crises. Economic Modelling, 34, 5-14.
  26. 26.   IMF Defacto Exchange Rate Classification (2016). www.imf.org
  27. International Financial Statistics (IFS), International Monetary Fund Statistics CD-ROM.
  28. Jeanne, O. (1997). Are currency crises self fulfilling?: A test. Journal of International Economics, 1(43), 263-86
  29. Kaminsky G., S. Lizondo, M. Reinhart. (1998). Leading indicator of currency crises. IMF staff papers, No. 45, 1-48.
  30. Kibritcioglu Aycut (2004). An analysis of early warning signals of currency  crises  in Turkey, 1986-2004, from www.kibritcioglu.com
  31.   KOF globalization index (2016). http://globalization.kof
  32. Krugman, P. (1979). A model of balance of payments crises. Journal of Money Credit and Banking, 11(3), 311-325.
  33.   Krugman, P. (1998a). What happened to Asia?, mimeo. MIT.
  34. Krugman, P. (1998b). Saving Asia: It"s time to get radical, Fortune Investor, September 7.
  35. Ley, E., Steel, M.F. (2009). On the effect of prior assumptions in Bayesian model averaging with applications to growth re-gressions. Journal of  Applied Econometrics, 24 (4), 651–674.
  36. Ley, E., Steel, M.F. (2012). Mixtures of g-priors for Bayesian model averaging with economic applications. Journal of Econometrics, 171 (2), 251–266.
  37. Madigan, D., York, J. (1995). Bayesian graphical models for discrete data. International Statistical Review, Vol. 63, 215–232.
  38. Masson,P. (1998). Contagion: Monsoonal Effects, Spillovers, and jumps between multiple equilibria. International Monetary Fund
  39. working paper 98/U2.
  40. McKinnon,R.and Pill,H. (1996). Credible liberalization and international capital flows: The "overborrowing" syndrom', in T. Ito and A.Krueger (eds). Financial Deregulation and Integration in East Asia (Chicago: The University of Chicago Press).
  41. Moshiri  S. and Nadali M. (2013). The determinants of banking crises in Iranian economy, Journal of Economics Research, 13(48), 1-27. (in Persian)
  42. Motahari M., Lotfali Pour M. R. and Ahmadi Shadmehri M. T. (2016). Introducing an early warning system of exchange rate volatility in Iranian exchange market: Markov switching GARCH method. Journal of Applied Theories of Economics, 2(4), 71-92. (in Persian)
  43. Naderi M. (2004). An early warning system for detection of financial crises in the economy of Iran. Iranian Journal of Economic Research, 5(17), 147-174. (in Persian)
  44. Obstfeld, M. (1994). The logic of currency crises. Cahiers economiques et Moneta/res, Vol. 43, 189-213.
  45. Obstfeld, M. (1996). Models of currency crisis with self-fulfilling features. European Economic Review, Vol. 40, 1037-48.
  46. Radlett,S. and Sachs. J. (1998). The east Asian financial crisis: Diagnosis, remedies. Prospects. Brookings papers on economic activity, 28(1),  1-74.
  47. Raftery, A.E. (1995). Bayesian model selection in social research. Sociological Methodology, Vol. 25, 111–163.
  48. Raftery, A.E., Madigan, D., Hoeting, J.A. (1997). Bayesian model averaging for linear regression models. Journal of the American Statistical Association, 92 (437), 179–191.
  49. Rangvid, J.A. (2001). Second generation models of currency Crises. Journal of Economic Surveys, Vol. 15, 613-46.
  50. Roper, D.E. and Turnovsky, S.J. (1980). Optimal exchange market intervention in a simple stochastic macro model. The Canadian Journal of Economics, Vol.13, 296–309.
  51. Sachs,J. (1995). Do we need an international lender of the last resort?. mimeo.Harvard.
  52. Sala-I-Martin, X., Doppelhofer, G., Miller, R.I. (2004). Determinants of long-term growth: a Bayesian averaging of classical estimates (BACE) approach. American Economic Review, 94 (4), 813–835.
  53. Sayadnia Tayebi E., Shajari H., Samadi S. and Arshadi A. (2012). Explaination an early warning system for identification of the financial crisis in Iran. Journal of Monetary & Banking Researches, 2(6), 169-211. (in Persian)
  54. Shajari P. and Mohebi Khah. B. (2010). Early warning system for currency and banking crisis in Iran (KLR- signaling approach). Journal of Monetary & Banking Researches, 2(4), 115-152. (in Persian)
  55. Tayebi  S. K. and Mohammadzadeh A. (2010). The impact of capital control on currency crises in developing countries. Iranian Journal of Economic Research, 14(43), 161-187. (in Persian)
  56.   Transparency Int. (2016). http://www.transparency.org/
  57.    UN Comtrade Database (2016). http://comtrade.un.org/
  58. Weymark D.N. (1997a). Measuringthe degree of exchange market intervention in a small open economy. Journal of International Money and Finance, Vol, 16, 55–79.
  59. Weymark D.N. (1997b). Measuring exchange market pressure and intervention in interdependent economies: A two-country model. Review of International Economics, 5(1), 72–82.
  60. World Development Indicators (WDI) (2016). http://data.worldbank.org
  61.   World Economic Outlook Database (WEO) (2016). https://www.imf.org/external/pubs/ft/weo
  62. Zellner, A. (1986). On  assessing prior distributions and Bayesian regression analysis with g-prior distributions. In: Bayesian inference and decision techniques: Essays in honor of Bruno de Finetti. North-Holland: Amsterdam.
  63.    Zeugner, Stefan (2011). Bayesian model averaging with BMS, http://bms.zeugner.eu/

Files

Share

How to cite

Statistics