prediction of currency crises using a fiscal sustainability indicator

7/28/2019 PREDICTION OF CURRENCY CRISES USING A FISCAL SUSTAINABILITY INDICATOR

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prediction of currency crises using a fiscal 39

rv a em, V. 26, n 2, . 39-60 (dmb 2011)

PREDICTION OF CURRENCY CRISES USING A FISCAL

SUSTAINABILITY INDICATORPREDICCION DE CRISIS CAMBIARIA USANDO UN INDICADOR DE

SOSTENIBILIDAD FISCAL

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ALEXIS CRUZ-RODRIGUEZ*uv c s dm

Abstract

The purpose of this paper is to investigate whether a fiscal sustainabilityindicator (FSI) can be used as a leading indicator to predict currency crises.Firstly, the sustainability of the fiscal policy in 17 developing countries isanalysed using a FSI developed by Croce and Juan-Ramn (2003). Then,the FSI is evaluated in order to help predict currency crises. Using a non-linear Markov-switching model, and applying the Gibbs sampling approach,it is found that the FSI influences the probability of entering a currencycrisis period. Also, in the absence of official definitions for currency crises,different definitions are used to evaluate whether they induce differentresults in the analysis. In general, the results highlight how an unsustainable

fiscal position leads to the eventual collapse of the exchange rate in somedeveloping countries.

Kw: Currency crisis, foreign exchange, fiscal sustainability.

Jel c: F31, F33, E62.

Resumen

El propsito de este trabajo es investigar si un indicador de sostenibilidadfiscal (FSI) puede ser utilizado como indicador lder para predecir crisiscambiarias. Para evaluar esto, en primer lugar se analiza la sostenibilidad


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40 reVista de analisis econoMico, Vol. 26, n 2

de la poltica fiscal en 17 pases en desarrollo, utilizando el indicador desostenibilidad fiscal desarrollado por Croce y Juan-Ramn (2003). Luego,se utiliza un modelo de Markov con cambio de rgimen, aplicando elmtodo de muestreo de Gibbs, para evaluar si el FSI ayuda a predecir crisiscambiarias. Los resultados sugieren que el FSI influye en la probabilidadde entrar en un perodo de crisis cambiarias. Asimismo, en ausencia de unadefinicin oficial de crisis cambiarias, se usan distintas definiciones conel fin de evaluar si las mismas inducen a diferentes resultados. En general,los resultados ponen de manifiesto cmo una situacin fiscal insostenibleconduce a un eventual colapso del tipo de cambio en algunos pases endesarrollo.

pb cv: Crisis cambiaria, tipo de cambio, sostenibilidad fiscal.

c Jel: F31, F33, E62.

I. INTRODUCTION

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th m h w: s 2 v bvw h h y . s 3 y . s 4 f sbyi mwk h tVtp Mkv-wh m.

s 5 b h b. s 6 m h. f, s 7 h mk.

II. THE ROLE OF FISCAL POLICY IN CURRENCY CRISES: A LITERATUREREVIEW

ex y h bw v y h , m hm h m. th m, v k m, mm mb (Km, 1979, 1996; f gb, 1984;f M, 1996). th m h -h y h m qbm (ob,1986, 1996; rv, 2001). fy, h m h q m hz h bk m h k m (ch V, 2001). M h h m . Hwv, h m v mwk h .

f m h q mm hm y . a Km (1979), h h h m mm .i bw y m xh m h bm h m ( h h ).


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m v h mhm hh whh mb hh . cy h y h v v k, m v v b mm hw b vv k h m.

r b h h m h m m m d (2001); c Mkwk(2005, 2006); B et al. (2003, 2006); m h.1 d (2001) y h h hw h wh h hy w h v my , v

, m h v vm b h xh . o y v h m by x xh m, h my y wh h - vby hm. sm, c Mkwk (2005) mwk wh mb. i wh m h v k y , hy h h m b b ky m h mm ym , w h m xh jm mb. ih m wy, c Mkwk (2006) m mwk yh m y . th y b mm w,wh h m v b hw, mb h bm v. th wk hw m h m h m v k v. Mv, B et al. (2003, 2006) qbmm whh v vm y , xh m h wh .

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1 th b mm vw v h Km m.


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mb. d (1997) v v m h - x xh , h h m b h h h vm v. H wk h b h h m b m h m b vm .

o h h h, m h m y h mj h m. th m h m hz v bw. th m hz b m h y by vm b m m xv

k-k b m. H, w , mb bk bm, m mmh bk b h z vb. th h, bk m w h mmhm, b vm b (m ) bmmmm h mm b , wh bk . Hwv, h m k wh h m h . M p (2003) m qbm m v m mk. thy hw h x b xh v, wh v bw v. sm, Bet al. (2000) h q b bh b b h m b m bk m.

i h y, nhhb Bzz (1993) v m 28 b-sh a h 1980-1991. th h h wh h b hh m m b,h mvm hk mv m. eh et al. (1994) m

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h bb b h -eh r Mhm (erM)m. c, fk r (1996) , v 100 v m 1971 1992, hw h b m hk . Kmk rh (1999) m bk 20 ( v) h 1970-1995. th h b hh h w , m q . sm, azz et al. (2000) k mm h m v mm vb m m bw 1975 1997. th h b, v, w b h h wh m.

swk (2000) mv y h mb y . sh xm h bhv mb vbb h , m q , 50 v h 1980-1999. f bh v m, h w b h m hhv b b. ay, B M (2006) h mbhv h xh mk l am cbb b h e a p . sm,M B (2008) (lsdV) mh mm(gMM) 28 l am cbb hw h m

b h h h mk.o h h h, h hv b m m y

, whh m h h w mk y m b. sm h h , vv y, , m h, y (gj V, 1997; Bk c, 2002). oh k mk v y (Bm My, 2004;s, 2004). sm h m m h mh. Hwv, h m f sb i.

th h m h .

III. DEFINING CURRENCY CRISES

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h h mk b . i h m, y ( v k) my v.a q, v k h b h h h vb h m v (g r, 1977;eh et al., 1996). th m mh m h . f, b h mvm m h h b fk r (1996). th m v wh v . W m h m

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IV. METHODOLOGY

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m h b gdp h b . f, Mkv-wh m (wh m-vy bb) .

4.1. Establishing Government Fiscal Sustainability

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4.2. Markov-Switching Model of Crises with Endogenous Transition Probabilities

t v h , Mkv-wh m h f g (1998).

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v hh m , mh hh h 1 m v m .


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prediction of currency crises using a fiscal sustainability indicator

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