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THE ARGENTINEAN CURRENCY CRISIS: A MARKOV‐SWITCHING MODEL ESTIMATION
Author(s) -
ALVAREZPLATA PATRICIA,
SCHROOTEN MECHTHILD
Publication year - 2006
Publication title -
the developing economies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.305
H-Index - 30
eISSN - 1746-1049
pISSN - 0012-1533
DOI - 10.1111/j.1746-1049.2006.00004.x
Subject(s) - currency crisis , univariate , currency , economics , speculation , estimation , markov chain , exchange rate , monetary economics , econometrics , financial crisis , european monetary system , keynesian economics , macroeconomics , multivariate statistics , statistics , mathematics , management
In 2002, the Argentinean currency board came to a sudden and dramatic end. Although the country had been suffering from weak economic fundamentals for years, the timing and severity of the currency crisis surprised most observers. The present study analyzes the role of fundamentals and self‐fulfilling speculation in the Argentinean crisis. Arguing within a theoretical model of a fixed exchange rate system that allows for multiple equilibria, we show that the crisis, although associated with weak fundamentals, cannot be explained by these macroeconomic factors alone. Estimating a univariate Markov‐switching model, the current study shows that shifts in agents’ beliefs did indeed also play a crucial role.