Real and financial shocks, exchange rate regimes and the probability of a currency crisis

Abstract

We analyze the relationships among shocks, exchange rate regimes, and capital controls in relation to the probability of a currency crisis. Based on the theoretical model by Nakatani (2016, 2017a), we use panel data on 34 developing countries and apply a probit estimation. We find that both productivity shocks and risk premium shocks trigger currency crises, whereas productivity shocks are important for severe currency crises. We also find that the effects of these shocks on the probability of a crisis are larger for floating exchange rate regimes and that capital controls mitigate the effects of productivity shocks in pegged regimes.