Money and credit, competitiveness, and currency crises in Asia and Latin America

Abstract

This paper analyzes the role of money, credit, trade and competitiveness variables in signaling currency crises in a sample of East Asian and Latin American countries over the period 1972:01 - 1997:10. Bivariate tests suggest that money and credit, as well as trade and competitiveness variables, appear to behave differently around crisis episodes than they do during periods of tranquility, suggesting that they may help signal currency crises. In multivariate probit regressions, which allow for the identification of marginal contributions of individual variables, reductions in real domestic credit and in foreign reserves as well as appreciation in the real exchange rate imply increases in the probability of a crisis. Real exchange rate appreciation appears to play a greater role in predicting currency crises in East Asia, while foreign reserve losses play a greater role in Latin America.

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