The Warning System of Currency Crisis—Importance of Current Account and Financial Account
Date Issued
2011
Date
2011
Author(s)
Yang, Chih-Lin
Abstract
This Paper tries to construct a warning system which can predict the currency crisis. The main variables are Current Account and Financial Account. We use 2 kinds of method to measure the current account: CA/GDP and CA Threshold and one method to measure financial account: FA/GDP, FDI/GDP, FPI/GDP and FOI/GDP.
From the empirical results, we found that among the macro-economic variables, the inflation rate、foreign exchange/GDP performs better than real GDP growth rate with significant results, while real GDP growth rate can’t explain the currency crisis significantly. The empirical results of inflation rate、foreign exchange/GDP is consistent with out hypothesis while DC/GDP is opposite with our hypothesis. When we added CA/GDP and CA Threshold into the model, both of them has the significant results. The lower the CA/GDP, the higher the probability of currency crisis. FDI/GDP, FOI/GDP is consistent with our hypothesis but the results are not significant. When we take the CA*FA into consideration, CA*FA is significant (10% significance level)negative related with the currency crisis. It shows that when CA/GDP<-4% and FA/GDP <-4%, the probability of currency crisis increases.
Subjects
Currency Crisis
Warning system
Current Account
Financial Account
Type
thesis
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