This paper predicts ex-ante the probability of currency crises end size of
expected devaluations month by month for Mexico between 1980 and 1986
using a heterodox linear discrete time model of exchange rate crises. The
forces contributing to speculative attacks on the Mexican peso include internal
money creation, external credit shocks, and relative price shocks. The
framework proves highly successful for generating forecasts of the probability
of speculative attacks on the peso and for predicting lower bounds for post-
collapse exchange rates using a range of assumptions about critical levels of
central bank reserve floors. Simulation results suggest that reducing domestic
credit growth, increasing the uocertainty surrounding this growth, and reducing
the size and perhaps increasing the frequency of currency realignments might
have greatly reduced the amount of currency speculation against the peso in
some of the crisis periods between 1980 and 1986.
*Published:
Journal of International Economics, vol. 36, no. 3/4, May 1994, p.413-430.
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