Distinguishing between Observationally Equivalent Theories of Crises

Distinguishing between Observationally Equivalent Theories of Crises

The objective of this paper is to empirically test across alternative, apparently observationally equivalent theories of currency crises. Theories of crises are often difficult to distinguish from each other based on the behavior of commonly used...

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Bibliographic Details
Main Author:	Shankar, Rashmi
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	ADVERSE SELECTION ASSETS ASYMMETRIC INFORMATION BALANCE OF PAYMENTS BALANCE SHEET BANK ASSETS BANK GUARANTEES BANK RUNS BANKING CRISES BANKING CRISIS BANKING SECTOR BANKING SYSTEM CAPITAL ACCOUNT LIBERALIZATION CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL FLOWS CAPITAL INFLOWS CENTRAL BANK CONTINGENT LIABILITIES CURRENCY CRISES DEBT DEPOSIT INSURANCE DEVALUATION DEVELOPED COUNTRIES DOMESTIC CREDIT DOMESTIC INVESTMENT EMERGING MARKETS EMPLOYMENT EQUILIBRIUM EXCHANGE RATE EXPROPRIATION FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL LIBERALIZATION FINANCIAL SECTOR FOREIGN ASSETS FOREIGN BANKS FOREIGN CAPITAL GDP GDP DEFLATOR GROWTH RATE ILLIQUIDITY IMPLICIT GUARANTEES IMPORTS INEFFICIENCY INFLATION INSOLVENCY INSURANCE INTEREST RATE INTEREST RATES INTERNATIONAL RESERVES LENDER OF LAST RESORT LIQUID ASSETS LIQUIDITY M2 MACROECONOMIC POLICIES MAXIMUM LIKELIHOOD ESTIMATION MONETARY AUTHORITIES MONETARY POLICY MORAL HAZARD POLICY MAKERS PORTFOLIO PUBLIC DEBT RANDOM WALK REAL GDP REAL WAGES RECESSION STOCK PRICES TIME SERIES TRANSMISSION MECHANISM VOLATILITY VULNERABILITY
Online Access:	http://documents.worldbank.org/curated/en/2002/11/2075371/distinguishing-between-observationally-equivalent-theories-crises http://hdl.handle.net/10986/19202

Description
Summary:	The objective of this paper is to empirically test across alternative, apparently observationally equivalent theories of currency crises. Theories of crises are often difficult to distinguish from each other based on the behavior of commonly used predictors. Using a comprehensive data set on gross external assets and liabilities for 167 countries created by the World Bank's Latin America and the Caribbean Region and the Development Research Group, this study is able to make a significant move toward redressing this shortcoming. It focuses on identifying potential crisis predictors, as well as testing the validity of the distinct transmission mechanisms implied by various theories of currency crisis. Evidence is presented in support of insurance-based models, suggesting that proxies for contingent liability accumulation are effective crisis predictors.