Empirical linkages between exchange rate regimes and currency crises

This dissertation investigates empirically the role of exchange rate regimes in explaining the severity of the Mexican and Asian currency crises. Most of the previous empirical literature concerning this issue used crude measures of exchange rate regimes. To improve on this, I develop a new behavioral classification of exchange rate regimes by carefully considering the institutional characteristics of exchange rate regimes and the degree of intervention that is related to exchange market pressure.; The impact of exchange rate regimes on currency crises is estimated using regression analysis on a panel-data set of 26 countries for the 1994 Mexican crisis and the 1997 Asian crisis period. This study emphasizes the importance of considering economic and political variables combined with pegged exchange rates. The vulnerability to currency crises appears to be higher for countries with pegged exchange rates when countries have a high ratio of short-term debt to reserves and small export-oriented sectors. One of the interesting results is that different classifications of exchange rate regimes can give quite different results with regards to how pegged exchange rate regimes affect currency crises. I find that pegged regimes significantly increased the severity of the Asian crisis only when most of the countries experienced in the crisis were classified as peggers. I also find evidence that crawling peg/band regimes exert a positive influence on financial vulnerability. However, I do not find evidence to support the argument that narrow peg regimes are more vulnerable than crawling peg/band regimes. These results suggest that pegged exchange rate regimes are more vulnerable to currency crises. However, moving from narrow pegged to crawling peg/band regimes is not sufficient to avoid crises.