Evaluating currency crises: A multivariate markov regime switching approach*

Abstract

This paper provides an empirical framework to analyse the nature of currency crises by extending earlier work of Jeanne and Masson (2000; Journal of International Economics, Vol. 50, pp. 327-350). Jeanne and Masson suggest a Markov regime switching models to analyse models of currency crises with multiple equilibria. This paper further contributes to the literature by suggesting a multivariate Markov regime switching model. In the new set-up, one can test for the impact of the unobserved dynamics of fundamentals on the probability of devaluation. © 2012 Blackwell Publishing Ltd and The University of Manchester