DP1349 Currency Crashes in Emerging Markets: Empirical Indicators

Author(s): Jeffrey A Frankel, Andrew K Rose
Publication Date: February 1996
Keyword(s): Composition, Data, Debt, Developing, Exchange Rate, Macroeconomic, Panel
JEL(s): F32, F34
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1349

We use a panel of annual data for over one hundred developing countries from 1971?92 to characterize currency crashes. We define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation. We examine the composition of the debt as well as its level, and a variety of other macroeconomic factors, external and foreign. Crashes tend to occur when: output growth is low; the growth of domestic credit is high; and the level of foreign interest rates is high. A low ratio of foreign direct investment to debt is consistently associated with a high likelihood of a crash.