Loss of confidence and currency crises

Spanjers, Willy (2005) Loss of confidence and currency crises. (Discussion Paper) Kingston upon Thames, U.K. : Faculty of Arts and Social Sciences, Kingston University. 32 p. (Economics Discussion Paper)

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Abstract

Loss of confidence is interpreted as an increase in the ambiguity experienced by investors who maximize Choquet Expected Utility. Currency crises are modelled to resemble bankruns. Using countries having fragile financial systems, a model of twin crises is obtained. An exogenous interim loss of confidence may trigger a crisis, even when the 'fundamentals' remain unchanged. Not recognizing ambiguity has a similar effect. Investors 'overreact' to bad news, as it leads to an endogenous loss of confidence. The stylized facts of the South-East Asian crisis fit the model, and it conforms well to the basic structure of the EU-accession countries in the run-up to their adoption of the Euro. Transparency, competence, and political stability, offer some protection against currency crises by increasing the level of confidence. The best protection, however, is provided by a stable financial system, as this enables share prices to absorb the impact of a loss of confidence.

Item Type: Monograph (Discussion Paper)
Additional Information: Economics discussion paper, 2005/2
Physical Location: This book is held in stock at Kingston University Library.
Uncontrolled Keywords: fixed exchange rates, currency crises, ambiguity, choquet expected utility, euro area, central europe, eastern europe
Research Area: Economics and econometrics
Faculty, School or Research Centre: Faculty of Arts and Social Sciences > School of Economics (until November 2012)
Depositing User: Lyn Porteous
Date Deposited: 15 Feb 2008
Last Modified: 16 Jul 2012 21:47
URI: http://eprints.kingston.ac.uk/id/eprint/1943

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