Output Losses from Currency Crises and the Role of Central Bank

Abstract

Generally, one of the important issues related to currency crises is the output losses caused by these phenomena. In this study, determinants of output losses and particularly the role of the central bank will be evaluated during currency crises. Moreover, the paper tries to investigate the roles of macroeconomic variables and also monetary, fiscal and exchange rate policies on the output losses during currency crises. In this regard, an econometric model with panel data has been used for emerging market countries during 1980-2016. The results show that currency crises accruing have a positive and significant effect on output losses. While the successful defence of central bank has had the negative effects on the output losses, but it is positive for the unsuccessful defence and the non-intervention or immediate depreciation. However, the role of the macroeconomic condition is important where total foreign reserves can be considered as a buffer against the output losses, while inflation and deviation of the real exchange rate from its trend have had positive effects on the output losses. Finally, the output losses can be reduced by an active monetary, fiscal and exchange rate policies.