Uncertainty and Currency Crises: Evidence from Survey Data

Alessandro Prati and Massimo Sbracia

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies empirically how uncertainty affects speculation in the foreign exchange markets. We use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals. We find that uncertainty has a non-monotone effect on exchange rate pressures: namely, uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad. We prove that this prediction arises from a broad class of currency crisis theories, ranging from first-generation to global-game models. We also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias.

Keywords: First-generation models; Global games; Information; Speculation (search for similar items in EconPapers)
JEL-codes: D82 D84 F31 (search for similar items in EconPapers)
Date: 2010-03
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Related works:
Journal Article: Uncertainty and currency crises: Evidence from survey data (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:21209

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