Prediction and management of currency crises in latin America

Abstract

In recent decades, currency crises in Latin America have often marked the beginning of prolonged periods of inflation, economic recession, and depressed foreign investment. Attempts to anticipate such financial breakdowns have met with relatively little success. As the survey of existing models indicates, there seems to be little hope for the development of a forecasting framework able to predict exchange rate movements with a sufficient degree of accuracy and anticipation that would allow policy makers to mount a timely intervention in currency markets. The analysis of past currency crises, however, shows some common elements which might help formulate benchmarks that could be used as predictive parameters in the fiture. This paper provides a survey of the models and tools currently used to predict exchange rate movements. It analyzes the origin and evolution of the 1994 Mexican Peso crisis, its contagion effects on other Latin American