Are Speculative Attacks Triggered by Sunspots?: A New Test
Bank for International Settlements, Monetary and Economic Department, 2004 - Currency crises - 35 pages
The empirical methodology of the paper establishes if a speculative attack, which is accounted for via sunspots in the presence of multiple equilibria, could have been in fact driven uniquely by economic fundamentals. The methodology is based on the theoretical models of Bertola and Svensson (1993) and Tarashev (2003). The first model captures robust stylised facts from target zone regimes, whereas the second one implies that both unique and multiple equilibria can account for violent speculative attacks. The characteristics of the theoretical foundations and their implications for the employed statistical test distinguish the paper from previous structural empirical analyses of market bets against pegged currencies. The methodology is applied to the experience of two ERM countries in the fall of 1992. The attack on the French Franc is found to be triggered by sunspots, whereas it is impossible to determine whether a similar scenario or the state of the economy alone underpins the currency crisis in Italy.
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$1 branch $1 schedule affine transformation Appendix assumption authority’s Bertola and Svensson central parity Claudio Borio coefficients conﬁdence interval Currency Crises Deﬁning deﬁnition denoted Deutsche Mark dynamics economic fundamentals eigenvalue empirical analysis empirical exercise empirical procedure equations equilibrium uniqueness exchange and interest exchange rate regime exogenous expression ﬁgure ﬁltered ﬁnancial ﬁnd ﬁrst Fixed Exchange Rate ﬂows foreign exchange markets French Franc g yt generalised highest pre-attack level implies inference inﬂuence interest and exchange interest differential interest rates International Settlements Italian Lira data Jeanne and Masson Jenkins modelling philosophy Kenneth Rogoff Lars E O Svensson linear function macroeconomic market behaviour market devaluation expectations mean-reversion parameters Monetary multiple equilibria null hypothesis Obstfeld panel of Figure paper process of f proﬁle of devaluation reﬂect sample Section self-fulﬁlling speciﬁcation Spot/next Step Tarashev target zone regime triggered by sunspots underlying unique equilibrium values variables violent speculative attack