Are Currency Crises Predictable?

Note: Below is a description of the paper and not the actual abstract. This paper studies whether exchange rate expectations and overvaluations are predictors of currency crises using survey data for 26 countries in the last 13 years. The results suggest that overvaluation has predictive power in explaining crises since it shows that real exchange rate misaligment is a good predictor even out-of-sample (i.e., using only past information to predict crises). Independently of the possible role of the real exchange rate, expectations should incorporate all information available, including other leading indicators, when predicting crises. However, the results show that expectations cannot predict crises. Therefore, from the perspective adopted in this paper, exchange rate crises are largely unpredictable events