Second thoughts on second moments : panel evidence on asset-based models of currency crises

The literature on speculative attacks has been given new impetus by the collapse of the European currency arrangements beginning in 1992, by the Mexican peso crisis and after-effects in 1994, and most recently by speculative attacks across Asia. One stand of this literature stresses the importance of imbalances in stocks of monetary and financial aggregates rather than traditional"flow"factors, arguing that massive, volatile capital flows have become a dominant feature of the global landscape, and that exchange-rate levels and current accounts have not proved convincing as proximate causes of crises. The authors test two popular asset-based models of speculative attacks -- Krugman and Rotemberg (1992) and Calvo and Mendoza (1995) -- especially their emphasis on the second moments of monetary aggregates. Analyzing monthly panels of appropriate countries in three regions, they find evidence for the importance of money/reserve ratios predicted by both models, and their variance as predicted by Calvo and Mendoza. But the variance of velocity does not appear to be important, casting some doubt on the Krugman-Rotemberg target zone framework and the interpretation of the Calvo-Mendoza results.