Exchange rate regimes, fiscal stance and currency crises

• Main Author: Cruz, Alexis
• Published: University of Surrey 2007
• Subjects: 330
• Online Access: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.731091

This thesis addresses a set of issues related to the choice of an exchange rate regime, including the effects of different regimes on inflation, growth, and their vulnerability to currency crises. It also explores the ability of a fiscal sustainability indicator to predict these crises and employs a selection of Latin American countries to assess whether their business cycles are sufficiently synchronised with that of the United States to support dollarization. Chapter 1 briefly sets the stage for the issues that will be discussed. Chapter 2 introduces the basic concepts that recur throughout the thesis exploring more than 30 years of ideas on the issues surrounding the selection and assessment of exchange rate regimes. Chapter 3 provides empirical support for the hypothesis that different exchange rate regimes have an impact on inflation and growth, as well as on currency crisis vulnerability in advanced, emerging and developing countries. The analysis is facilitated through the use of an exchange market pressure indicator. Chapter 4 is an empirical study on the synchronisation and common cycles between selected Latin American countries and the United States. The dynamics of business cycles are estimated separately for each country using a univariate Markov-switching autoregressions (MS-AR) approach. Afl the countries under study have experienced persistent but shorter durations of contractions (recessions) than expansions and their mean growth is lower in absolute value than those for expansions. The different behaviour in the duration and variances and the formal testing for asymmetry suggest that some cycles are asymmetric between regimes. The purpose of Chapter 5 is to assess fiscal sustainability and investigate whether a fiscal sustainability indicator (FBI) can be used as a leading indicator to predict currency crises. Firstly, the sustainability of the fiscal policy in 18 developing countries is analysed, and it is found that 12 countries have a large unsustainable fiscal position for most of the period studied, which is basically explained by the primary fiscal deficit. Then, using different procedures, the FSI is evaluated in order to help predict currency crises. Granger causality tests suggest that the lagged FSI has an explanatory power over currency crises. The results using a probit model support this view. Indeed, the FSI can predict the probability of currency crises. In addition, focusing on a non-linear Markov-switching model, and applying the Gibbs sampling approach, it is found that the FSI influences the probability of entering a currency crisis period. Also, in the absence of official definitions for currency crises, different definitions are used to evaluate whether they induce different results in the analysis. In general, the results highlight how an unsustainable fiscal position leads to the eventual collapse of the exchange rate in some developing countries. Finally, Chapter 6 is a summary of our main conclusions.