CURRENCY CRASH

In the past decades, the large incidence of currency crashes linked to episodes of financial crisis has given impulse to the development of an important branch of scientific crisis literature. Many researches also attempted to go further than the mere creation of vulnerability indexes and tried to predict in advance currency crises by using observable economic and socio-political variables. The key insight that motivated these empirical studies was not the assumption that currency crises were predictable, but instead the fact that the question of whether crises were predictable could only be settled in practice (Berg and Pattillo, 1999). However, in looking at crises empirically, it is important to define in practice what a currency crash is. For instance, Frankel and Rose (1996) carried out specific research on the stylised facts associated with currency crashes. They used data from 105 developing countries relative to the period 1971–92 and defined a currency crash as a large change of the nominal exchange rate. In practice, they selected only depreciations of 25% or more over the year, and exceeding the previous year’s depreciation by at least 10%. The choice of the threshold and the measure of the exchange rate movements used (the change in the natural logarithm of the nominal bilateral dollar exchange rate multiplied by 100) are arbitrary, and variants of this approach based on different cut off points have been used in literature. In general, the definition of currency crashes based only on the behaviour of the nominal exchange rate has served two purposes, to investigate the probability of a successful speculative attack against the currency, as well as its possible causes. However, it cannot necessarily be used to identify currency crisis episodes. Indeed, in the latter case, the definition of an event 1 may take into account also speculative attacks that are successfully warded off by the authorities through a decrease in reserves and/or increases in interest rates.
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1.Eichengreen et. al. (1995) define a speculative attack as a period of extreme pressure in the foreign exchange market, therefore they identify a currency crisis (event) by measuring the intensity of international speculative pressure through a speculative pressure index.

Bibliography
Berg A. and Pattillo C. (1999), "Predicting currency crises: The indicators approach and an alternative", Journal of International Money and Finance, Volume 18, Issue 4, August , pp. 561-586
Eichengreen B., Rose Andrew K.  and  Wyplosz C.(1995), "Exchange Market Mayhem: The Antecedents and Aftermath of Speculative Attacks", Economic Policy
Frankel J. and Rose Andrew K. (1996), "Currency Crashes in Emerging Markets: An Empirical Treatment", Journal of International Economics 4, pp. 351-368

Editor: Bianca GIANNINI
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