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The Nonlinear Dynamics of Foreign Reserves and Currency Crises

Author

Listed:
  • Chong Terence T. L.

    (Department of Economics, The Chinese University of Hong Kong)

  • He Qing

    (Department of Economics, The Chinese University of Hong Kong)

  • Hinich Melvin J

    (Applied Research Laboratories, University of Texas at Austin)

Abstract
A new early-warning system for international currency crises is developed in this paper. The existing crisis indicators in the literature are essentially static. We examine the relationship between the dynamics of foreign reserves and currency crises. It is shown that rapid reserve depletion is a prominent feature before the collapse of the exchange rate system. The results from our threshold autoregressive model suggest that when the Reserves-to-Short-Term External Debt falls by more than 29.1%, or if the Reserves-to-M2 ratio drops by more than 24.3% within six months, the likelihood of a crisis increases. Our model provides clear warning signals for policy makers to take actions before the reserves have reached a critical value that heralds the arrival of a full-blown crisis.

Suggested Citation

  • Chong Terence T. L. & He Qing & Hinich Melvin J, 2008. "The Nonlinear Dynamics of Foreign Reserves and Currency Crises," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(4), pages 1-18, December.
    • Handle: RePEc:bpj:sndecm:v:12:y:2008:i:4:n:2
    DOI: 10.2202/1558-3708.1605
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    References listed on IDEAS

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    Cited by:

    1. Chong, Terence Tai-Leung & Lam, Tau-Hing & Yan, Isabel Kit-Ming, 2012. "Is the Chinese stock market really inefficient?," China Economic Review, Elsevier, vol. 23(1), pages 122-137.
    2. Terence Tai-Leung Chong & Qing He & Wing Hong Chan, 2016. "From Fixed to Float: A Competing Risks Analysis," International Economic Journal, Taylor & Francis Journals, vol. 30(4), pages 488-503, October.
    3. Chong, Terence T.L. & Yan, Isabel K., 2018. "Forecasting currency crises with threshold models," International Economics, Elsevier, vol. 156(C), pages 156-174.
    4. He, Qing & Guo, Yongxiu & Yu, Jishuang, 2020. "Nonlinear dynamics of gold and the dollar," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    5. Yu-Hau Hu & Shun-Jen Hsueh, 2013. "A Study of yhe Nonlinear Relationships among the U.S. and Asian Stock Markets during Financial Crises," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 134-147, December.

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