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Poonam Gupta and Ratna Sahay are with the IMF and Deepak Mishra is with the World Bank. The views expressed in this paper are those of the authors and not necessarily of the organizations with which they are affiliated. They would like to thank Michael Adler, Michael Bordo, Eduardo Borensztein, Enrica Detragiache, Stanley Fischer, Homi Kharas, Amartya Lahiri, Timothy Lane, Prakash Loungani, Paolo Mauro, Gian Maria Milesi-Ferretti, Christian Mulder, Carmen Reinhart, Nouriel Roubini, Sergio Rebelo, Andrew Rose, Xavier Salai-Martin, Carlos Vegh, and Jeromin Zettelmeyer, as well as seminar participants at UC Santa Cruz, LACEA, a joint IMF/World Bank workshop, and the second Annual IMF Research Conference for many insightful comments. Haiyan Shi provided excellent research assistance.
Contraction (expansion) is defined as the difference between the growth rate during the crisis years and the average growth rate in precrisis tranquil years (See Section III).
Countries excluded from our sample are Barbados, Belize, Djibouti, Grenada, Haiti, Oman, Panama, Seychelles, St. Vincent and Grenadines, Tunisia, and Servia and Montenegro (formerly Yugoslavia).
These countries are Guinea, Israel, Liberia, Samoa, Taiwan Province of China, and Vanuatu.
Some of these studies do not cover the period until 1998. Therefore, where possible, we update the crises dates until 1998 by using the respective methodologies of the authors.
While we experimented with measures that capture the deviation of growth rate from a linear or nonlinear trend (such as the HP filter), we do not report the results as these measures seem inappropriate for analyzing the short-run effects of currency crises, in general, or for many developing countries undergoing structural changes frequently.
For example, the real effects of the Mexican crisis of December 1994 would not be captured, if n =1.
The Jarque-Bera test statistic indicates that the null hypothesis of a normal distribution cannot be rejected.
The LA debt crisis episodes include 1982-83 in the following countries: Argentina, Bolivia, Brazil, Chile, Ecuador, Mexico, and Uruguay. The Mexican crisis event includes Argentina and Mexico in 1994/95. The East Asian crisis includes crises in Indonesia, Korea, Malaysia, Philippines, and Thailand in 1997.
Capital account restrictions refer to the lack of convertibility of the domestic currency for capital account transactions. Exchange rate restrictions refer to the regulation of nominal exchange rate or when the country maintains dual or triple exchange rates.
Rodrik and Velasco (1999) define a currency crisis as a significant reversal of external capital flows.
The literature also offers several other demand and supply effects such as real balance effect, redistribution effect, costly input effect, and others, through which a currency devaluation can affect growth, see Agenor (1991) and Lizondo and Montiel (1989). We do not include these variables because either it was not possible to measure such effects or the required data were unavailable.
As mentioned earlier, the endogeneity issue could not be dealt with precisely in this analysis, given our inability to use data of higher than annual frequency.
The dummy takes a value of -1 if in three precrisis years the average growth rate is less than 0 percent, value 0 if the growth rate is 0-3 percent, and value 1 if the growth rate exceeds 3 percent.
A useful first step to see the association between the growth variable and the independent variables is to run bi-variate regressions (Table 3). Variables related to capital flows, foreign exchange restrictions, external debt burden, short-term debt and those proxying the initial conditions are closely associated with changes in the growth variable. However, only a few external or policy variables appear significant. To avoid multicollinearity-related problems, we also confirmed that the explanatory variables are not strongly correlated with one another (correlation coefficients range between -0.3 and 0.3).
The banking crisis dummy has a negative sign in all the various specifications, but it is significant, at the 10 percent level, in one regression when all domestic and external variables are included in the specification and the regression includes all the 157 data points.
In some specifications the estimated coefficients of these variables have counterintuitive signs, though the estimates themselves are not statistically significant.
The introduction of the policy variables does marginally change some of our previous results; namely, those related to the nominal debt burden, the short-term debt to reserves ratio, the foreign exchange reserve loss, the export growth, the size of the tradable sector and the oil prices, depending upon which policy variable is included in the regressions. However, given the endogeneity problems inherent in conducting a policy response analysis, these results can only be interpreted as indicating associations.
The main differences across the two samples are for the following variables: short-term debt to reserves, reserve loss, size of the economy, competitive devaluation and oil prices. In particular, while short-term debt exerts a bigger impact in the GKR/BP sample, it is not significant. Reserve loss does not have a significant impact in the GKR/BP sample; it is significant and negative in the FR/MR sample. A bigger economy implies higher growth during crises in both samples, but the effect is significant and larger only in the GKR/BP sample. An increase in oil prices predicts smaller growth in both samples, but the effect is bigger and significant only in the FR/MR sample. The competitive devaluation variable is negative and significant in the FR/MR and positive but insignificant in the GKR/BP. Regarding the remaining variables, the sign and magnitude of the coefficients and their significance are similar across the two groups.
Some of these studies exclude crisis dates that are “too close” to each other. As a starting point, we include all dates, but our majority rule automatically excludes crises too close to each other.