Download 2. chapter currency crisis models and predicting a currency crisis

YAŞAR UNIVERSITY
GRADUATE SCHOOL OF SOCIAL SCIENCES
……. PROGRAMME
MASTER/PHD THESIS
TEZ BAŞLIĞI
FULL NAME
THESIS ADVISOR: ASST./ASSOC./PROF.DR. XXX YYY
20XX İZMİR.
We certify that we have read this thesis and that in our opinion it is fully
adequate, in scope and in quality, as a thesis for the degree of Master of
Arts/the Doctor of Arts.
Jury Members:
Signature:
Asst./Assoc./Prof.Dr. Xxx YYY
… University
Asst./Assoc./Prof.Dr. Xxx YYY
… University
Asst./Assoc./Prof.Dr. Xxx YYY
… University
Asst./Assoc./Prof.Dr. Xxx YYY
… University
Asst./Assoc./Prof.Dr. Xxx YYY
… University
Asst./Assoc./Prof.Dr. Xxx YYY
… University
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----------------------------------------------------------------Asst./Assoc./Prof.Dr. Xxx YYY
Director of the Graduate School
ABSTRACT
TEZ BAŞLIĞI
First Name, Surname
Msc/PHD, Name of the Programme
Advisor: Asst./Assoc./Prof. Xxx YYY
20XX
After the year 1990s, following the financial liberalization attempts, currency
crises have been a common occurrence in developing countries. In the literature, both
theoretical and empirical models were developed and economists have tried to explain
the main reasons behind the crisis. Currency crises have contagion effects, thus predicting
the variables which may lead to increase the possibility of financial crises are used in order
to understand crises periods.
The main purpose of this study, between the years 1987-2007, the currency
crises occurred in 15 emerging countries, to assess which variables have explanatory
power regarding the currency crisis with an unbalanced panel data analyze. In this
paper, currency crisis (CCI) as a dependent variable is made as a weighted average of real
exchange rate changes, international reserves changes and real interest rate changes and
seven explanatory variables.
The estimation results show that the leading indicators of currency crises are
money supply growth rate (M2GROWTH), domestic credit provided by banking
sector (BANKDC) and current account balance / reserves(CABTR). Thus, these
results provide evidence in support of the thesis that currency crises are systematically
related to the fundamental weaknesses in the real and financial sectors of the economy and
parallel with the other empirical studies as well.
Keywords: currency crises models, panel data analysis, theories of financial crises.
ÖZ
TEZ BAŞLIĞI
Adı Soyadı
Yüksek Lisans / Doktora Tezi, Program Adı
Danışman: Yrd. Doç./Doç./Prof. Dr. Xxx YYY
20XX
Gelişmekte olan ülkelerde finansal liberalleşme sürecini takiben özellikle
1990’lı yıllardan itibaren para krizleri sıkça görülen bir olgu haline gelmiştir. Söz
konusu gelişmeler, literatürde para krizi modellerinin oluşmasına ve para krizlerinin
tahminine yönelik yapılan ampirik çalışmaların artmasına olanak sağlamıştır. Bir
ülkede yaşanan kriz diğer ülkelere de yayılabilmekte, bu nedenle krize sinyal teşkil
edebilecek göstergelerin belirlenmesi, olası krizlerin engellenerek, maliyetlerinin
azaltılması açısından önem arz etmektedir.
Çalışmanın amacı, 1987-2007 döneminde 15 gelişmekte olan ülkede yaşanan
para krizlerinin, hangi değişkenlerle açıklanabileceğinin panel veri analiziyle tahmin
edilmesidir. Modelde reel döviz kuru, reel faiz oranı ve döviz rezervlerindeki yüzde
değişimlerin standart sapmalarının oranına göre standartlaştırılmış değerlerinden
oluşan “para krizi indexi” bağımlı değişken olarak alınmış olup, indexi açıklayıcı 7
bağımsız değişken belirlenmiştir.
Analiz sonucunda, M2 para arzının büyüme oranı (M2GROWTH), cari
işlemler dengesinin rezervlere oranı (CABTR) ve bankacılık sektörünün özel Sektöre
açtığı kredi hacminin GSYİH’ye oranındaki yüzde değişme (BANKDC)’nin krize
sinyal teşkil ederek, para krizi olasılığının arttırdığı sonucuna varılmıştır. Modelde
elde edilen bulgular, bu ülkelerde görülen para krizlerinin I.nesil kriz modelleriyle
açıklanabileceğini göstermektedir.
Anahtar sözcükler: para krizi modelleri, panel veri analizi, finansal kriz teorileri.
ACKNOWLEDGEMENTS
I would like to thank my supervisor XXX for his guidance and patience during this
study.
Full Name
İzmir, 20XX
TEXT OF OATH
I declare and honestly confirm that my study, titled “THESIS TITLE” and presented
as a Master’s/PhD Thesis, has been written without applying to any assistance
inconsistent with scientific ethics and traditions. I declare, to the best of my
knowledge and belief, that all content and ideas drawn directly or indirectly from
external sources are indicated in the text and listed in the list of references.
Full Name
Signature
………………………………..
July 28, 2017
TABLE OF CONTENT
ABSTRACT ............................................................... Error! Bookmark not defined.
ÖZ ............................................................................................................................... iii
ACKNOWLEDGEMENT .......................................................................................... iv
TEXT OF OATH ....................................................................................................... vii
TABLE OF CONTENT .............................................................................................. ix
LIST OF TABLES ...................................................................................................... xi
LIST OF FIGURES .................................................................................................. xiii
LIST OF ABBREVIATION ...................................................................................... xv
INTRODUCTION ..................................................... Error! Bookmark not defined.
1. CHAPTER THEORIES OF FINANCIAL CRISIS………….…………………….5
1.1. The Core Characteristics of Financial Crises…………….……………..…..10
1.2. Keynes and Financial Crises..….………………………………………..….16
1.2.1. New Keynesian Theory: Asymmetric Information………………..…17
1.2.2. Post Keynesian Theory: Debt and Financial Instability Approach…..24
1.2.2.1. Fisher's Approach…………………… ……………..…..…..24
1.2.2.2. Minsky's Approach………………….……………..…..……25
1.2.2.3. Kindleberger's Approach……………………….…..…..…...27
1.3. Monetarism and Financial Crises...………………………………..………28
1.4. Random Withdrawal Risk………………………………………………....30
1.5. Theory of Speculative Bubbles……………………………………..….….30
2. CHAPTER CURRENCY CRISIS MODELS AND PREDICTING A
CURRENCY CRISIS…………………………………………………………………
2.1. Characteristics of Currency Crises……… …………………………….….60
2.2. Currency Crisis Models...………………………….……………………....64
2.2.1. 1.Generation Models………………..…………………… ……..…..65
2.2.2. 2. Generation Models ………………………………………...…….68
2.2.3. 3. Generation Models………………......……………...……..……...70
2.3. Early Warning Systems: Signal Approach…………………………..…….72
2.3.1. Literature Review …………………………………………..….…...77
2.3.2. Data and Model……………………….………………………...…...81
CONCLUSION ......................................................................................................... 95
REFERENCES......................................................................................................... 100
APPENDIXES…………………………………………………………………......105
BRIEF CURRICULUM VITAE…………………………………………………..107
LIST OF TABLES
Table 1. . .................................................................................. Error! Bookmark not defined.
LIST OF FIGURES
Figure 1… ................................................................................ Error! Bookmark not defined.
LIST OF ABBREVIATIONS
ADF
: Augmented Dickey-Fuller.
NBER
: National Breau of Economic Research.
NER
: Nominal Exchange Rate.
OECD
: Organization of Economic Development and Corporation.
OLS
: Ordinary Least Square.
PP-Fisher
: Phillips-Peron Fisher.
REM
: Random Effect Model.
Introduction
Financial crises have exhibited a characteristic of a “twin crises”,
banking crises with currency crises. Each currency crisis has differed in type
from the preceding one but following sequences sharp depreciation of
domestic currency followed by an abrupt recession, a loss of international
reserves and a capital outflow always present. In the theoretical literature
currency crises involve fixed Exchange rate regime or allowed currencies
float within certain margins. Exchange rate crises are observed in economies
which adapt fixed exchange rate regime as a result of abrupt speculative
attacks of economic agents try to sell domestic currency for foreign currency
until they expect that the government will not be able to defend fixed
exchange rate. In response, monetary authorities are forced to defend the
currency. If the authorities are no longer able to maintain the exchange rate,
they decide to devalue the currency. Clearly, many reasons for expecting
crises and due to a common cause, for instance policies may have similar
effects on emerging countries.
Thesis study is organized as follows. After the introduction, section
one reviews the theoretical literature on financial crises, and section two
discusses theoretical currency crisis models and the empirical literature on the
determinants on currency crises. The data, methodology and estimation
results of the models analyze in the same section, and the last part will
conclude and bring some remarks.
2. CHAPTER CURRENCY CRISIS
MODELS AND PREDICTING A CURRENCY CRISIS
2.3. Early Warning Systems: Signal Approach
2.3.1. Literature Review
Economists focus on the timing and causes of the crisis and try to explain
different experiences of countries by using models. Theoretical studies have
identified mainly two theoretical models the traditional or first generation models
(Krugman, 1979) and second-generation models (Obstfeld, 1986, 1994). These
models can be dubbed as Latin type crises models based on the presence of
inconsistent policies generates a speculative attack. Recent literature also
concentrates on the predictability of currency crises by developing statistical
methods like early warning systems (Kaminsky et al. 1998).
Eichengreen, Rose and Wyplosz (1996) analyzed spillover effects among 20
countries during the period of 1959 and 1973, 77 crises. They built a currency crisis
index constructed by changes in three variables international reserves, Exchange rate
and interest rates. Findings are speculative attacks on fixed exchange rates play a
significant role in currency crises.
Krugman (1996) studied on 5 industrialized countries are affected by the
ERM (1992-1993) crises by using annual, quarterly and also daily data over period
1988-1995. In this study four indicators, inflation, output gap, unemployment rate,
public debt to GDP ratio are used and all these indicators support that ERM does not
provide self-fulfilling crises.
Corsetti, Pesenti and Roubini (1998) studied on 24 countries whose economic
performances are affected by the 1997 Asia crisis. They construct a crisis index as a
measure of speculative pressure on a country currency at first. Then they compute a
set of indexes of financial fragility, external imbalances, official reserves adequacy
and fundamental performance. The crisis index consists of exchange rate
depreciation and foreign reserves. A negative sign of crisis index indicates more
severe currency crisis. They found that weak cyclical performances, low foreign
exchange reserves and financial deficiencies are the main reasons behind the Asian
collapse.
CONCLUSION
In this study, i try to explain the causes of currency crises by using
some crucial indicators. In order to analyze the currency crises we include the
GDP growth, bank liquid reserves to bank assets ratio, domestic credit
provided by banking sector, current account balance to reserves ratio, M2
growth, export growth to import growth ratio and portfolio investment to
foreign direct investment ratio variables. These indicators are commonly used
in signal approach, linear regression model and logit/probit models. Here, the
unbalanced panel data estimation results show that the leading indicators of
currency crises are M2 growth, domestic credit provided by banking sector
and current account balance to reserves ratio.
The results of empirical analysis provide evidence in support of the
thesis that currency crises are systematically related to the fundamental
weaknesses in the real and financial sectors of the economy. For example, the
current account deficit is one of the main reasons of the weaknesses toward a
possible currency crisis. Thus crises do not have self-fulfilling components.
At the same time, empirical results are parallel with the other empirical
studies as well.
REFERENCES
Akerlof, G. A. (2002). Behavioral macroeconomics and macroeconomic
behavior. The American Economic Review, 92, 411-433.
http://dx.doi.org/10.1257/00028280260136192
Beck, T. (2012). The Role of Finance in Economic Development – Benefits,
Risks, and Politics, Dennis Müller (Ed.), Oxford Handbook of Capitalism.
IMF (1998). Financial crises: characteristics and indicators of vulnerability.
World Economic Outlook, 110-142.
Kahraman, S. (2005). 1929-1939 İktisadi Devletçilik ve Sanayileşme
Politikaları. (Unpublished MA Thesis). İstanbul Üniversitesi, SBE, İstanbul.
Kaminsky, G., Lizondo, S. and Reinhart, M.C. (1998). Leading indicators of
currency crises. IMF Papers, 45(1).
Kindleberger, C. P. (2005). Manias, panics and crashes: A History of financial
crises. John Wiley & Sons.
Krugman, P. (1979). A model of balance of payment crises. Journal of Money,
Credit and Banking, 11(3), 311-325.
Krugman, P. (2002). Currency Crises. Retrieved from
http://web.mit.edu/krugman/www/crises.html
Levin, A., Chien-Fu, L. and Chia-Shang, C.(2002). Unit root test in panel data:
Asymptotic and finite sample properties. Journal of Econometrics,108(1), 125.
Minsky, H. P. (1992). The Financial Instability Hypothesis. The Jeroey Levy
Economics Institute Working Paper74. Prepared for Handbook of Radical
Political Economy. http://dx.doi.org/10.2139/ssrn.161024
Mishkin, F. S. (2006). The Economics of Money, Banking, and Financial Markets.
7edt, Pearson-Wellesley.
Mishkin, F. S. (2001). Financial Policies and the Prevention of Financial Crises in
Emerging Market Economies. NBER Working Paper 8087.
Mishkin, F.S. (1996). Understanding financial crises:A Developing country
perspective. NBER Working Paper 5600.
Obstfeld, M. (1996). Models of Currency Crises with Self-fulfilling Feature.
European Economic Review, 40(1), 1037-1047.