Exchange Rate Regimes and Currency Crises: an Evaluation using Extreme Value Theory

We test whether the exchange regime in place has an impact on the vulnerability of countries to currency crises. Our paper is distinguishable from others (i) in its use of extreme value theory to identify currency crisis periods and (ii) in using two separate designations for the exchange regime in place. The first is the self-reported or announced exchange rate system. The second classification scheme, by Levy-Yeyati and Sturzenegger, is based on the relative movements of international reserves and exchange rates. The Levy-Yeyati and Sturzenegger procedure is intended to reveal the actual as distinct from the "legal" exchange arrangement. We find, interestingly, that the announced exchange regime has an impact on the likelihood of currency crises, while the "true" or observed regime does not. Announced pegged exchange regimes increase the risk of currency crisis even if, in reality, the exchange rate system in place is not pegged. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.