This paper implements a regime-switching framework to study speculative attacks against EMS currencies during 1979-1993. To identify speculative episodes, we model exchange rates, reserves, and interest rates as time series subject to discrete regime shifts between two possible states: ''tranquil'' and ''speculative''. We allow the probabilities of switching between states to be a function of fundamentals and expectations. The regime-switching framework improves the ability to identify speculative attacks visa `-vis the indices of speculative pressure used in the literature. The results also indicate that fundamentals (particularly budget deficits) and expectations drive the probability of switching to a speculative state.
CITATION STYLE
Martinez Peria, M. S. (2002). A regime-switching approach to the study of speculative attacks: A focus on EMS crises. In Advances in Markov-Switching Models (pp. 159–194). Physica-Verlag HD. https://doi.org/10.1007/978-3-642-51182-0_8
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