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The Determinants of Currency Crises: A Political Economy Approach

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The Determinants of Currency Crises: A Political Economy Approach

The Determinants of Currency Crises: A Political Economy Approach By Bjorn Rother
Publisher: Palgrave Macmillan 2009-05-15 | 272 Pages | ISBN: 0230221815 | PDF | 1.3 MB

This book explores the role of political factors in the occurrence of currency crises, using an eclectic approach that blends case studies, a rigorous theoretical discussion, and econometric analysis.

A lot of research has been carried out on currency crises, but the existing literature largely fails to adequately recognize the role of politics in creating financial turbulence. This book explains the role of political factors in the occurrence of currency crises, using an eclectic approach that blends case study methodology, a rigorous theoretical discussion, and econometric analysis.

A lot of research has been carried out on currency crises, but the existing literature largely fails to adequately recognize the role of politics in creating financial turbulence. This book explains the role of political factors in the occurrence of currency crises. It starts out with a discussion of political developments in four prominent crisis cases, including Turkey and Argentina in the early 2000s, before discussing various extensions of a workhorse model of the economics literature, two of which are original, to show how upcoming elections, intra-governmental conflict, and lobbying activity can impact the stability of an exchange rate regime. The econometric analysis uses a diverse sample of 69 countries over 1975-97 to determine whether the inclusion of political variables can make a difference in crisis prediction without adding too much complexity, compared with standard early-warning-systems models that rely exclusively on macroeconomic fundamentals.

This book provides a thorough and in-depth report, seeking to translate concepts from the discipline of political science into the language of economics. It is essential reading for all interested in international political economy and financial crises.

List of Contents

Introduction
PART I: SOME CLUES FROM HISTORY
Introduction
Ending Gold Convertibility in the 1930s
Coalition Bickering in Turkey, 2000-01
Meltdown in Argentina, 1991-2002
Emerging Political Patterns
PART II: POLITICAL-ECONOMY CRISIS MODELS
Introduction
A Basic Second-Generation Model
The Credibility Problem of Currency Pegs
Two Types of Commitment Devices
Uncertainty and the Role of Elections
A Fiscal Veto Player
Currency Crises and Fiscal Policy Decisions
The Scope for Intra-Governmental Confict
A Stochastic Fiscal Target
Lobbying and Exchange Rate Stability
PART III: THE ROLE OF POLITICS IN CRISIS PREDICTION
Introduction
Literature Survey
Data Set and Empirical Strategy
Country Sample and Crisis Measure
The Choice of Regressors
Empirical Strategy
Key Findings
Descriptive Statistics
Political-Economy Logit Models
Robustness Checks
Extensions
The Link between Elections and Crises
The Link between Left Governments and Crises
Conclusion
Appendices
Deriving the Supply Function
Survey of Econometric Studies
Data Issues
Endnotes
Bibliography

Author Biography
BJÖRN ROTHER is an Economist at the International Monetary Fund in Washington DC, USA and worked previously as a consultant with Mckinsey & Company Inc. He holds a Doctorate in Economics from the Free University of Berlin.

Reviews
This book cuts to the heart of the policy making process by focusing on how political factors affect exchange rate decisions. By grounding insight from economics, economic history and political science in a consistent methodological framework, the author moves beyond the narrow focus of much of current economic research to produce a compelling account of the political economy of exchange rate decision making. (Dr. Domenico Lombardi, President, The Oxford Institute for Economic Policy)



The Determinants of Currency Crises: A Political Economy Approach



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The Determinants of Currency Crises: A Political Economy Approach
The Determinants of Currency Crises: A Political Economy Approach