DP1349 Currency Crashes in Emerging Markets: Empirical Indicators

Author(s): Jeffrey A Frankel , Andrew K Rose

Publication Date: February 1996

Keyword(s): Composition , Data , Debt , Developing , Exchange Rate , Macroeconomic , Panel

JEL(s): F32 , F34

Programme Areas: International Macroeconomics

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We use a panel of annual data for over one hundred developing countries from 1971–92 to characterize currency crashes. We define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation. We examine the composition of the debt as well as its level, and a variety of other macroeconomic factors, external and foreign. Crashes tend to occur when: output growth is low; the growth of domestic credit is high; and the level of foreign interest rates is high. A low ratio of foreign direct investment to debt is consistently associated with a high likelihood of a crash.