Evaluating the effect of de facto pegs on currency crises

• Published in: Journal of policy modeling Vol. 35; no. 6; pp. 943 - 963
• Main Author: Esaka, Taro
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.11.2013; Elsevier Sequoia S.A
• Subjects: Capital account liberalization; Currencies; Currency; Currency crises; Decision making models; Economic crisis; Economic policy; Economic theory; Estimation; Exchange rate regimes; Exchange rates; Foreign exchange rates; Liberalization; Macroeconomic policy; Macroeconomics; Matching methods; Mathematical problems; Self-selection bias; Studies; F31; F33; Matching methods; Capital account liberalization; Exchange rate regimes; Currency crises; Self-selection bias
• ISSN: 0161-8938; 1873-8060
• DOI: 10.1016/j.jpolmod.2013.02.002

This paper empirically evaluates the treatment effect of de facto pegged regimes on the occurrence of currency crises. To estimate the treatment effect of pegged regimes properly, we must carefully control for the self-selection problem of regime adoption because a country's exchange rate regime choice is nonrandom. To address the self-selection problem, we thus employ a variety of matching methods. We find interesting and robust evidence that (1) pegged regimes significantly decrease the likelihood of currency crises compared with floating regimes, and (2) pegged regimes with capital account liberalization significantly lower the likelihood of currency crises compared with other regimes. From the standpoint of the macroeconomic policy trilemma, we can reasonably conclude that pegged regimes with capital account liberalization are substantially less prone to speculative attacks because they can enhance greater credibility in their currencies by maintaining strict discipline for monetary and macroeconomic policies.