Currency crises, sunspots and Markov-switching regimes

This paper investigates the theoretical properties of a class of escape cla use models of currency crises as well as their applicability to empirical w ork. We show that under some conditions these models give rise to an arbitr arily large number of equilibria, as well as cyclic or chaotic dynamics for the devaluation expectations. We then propose an econometric technique, ba sed on the Markov-switching regimes framework, by which these models can be brought to the data. We illustrate this empirical approach by studying the experience of the French franc between 1987 and 1993, and find that the mo del performs significantly better when it allows the devaluation expectatio ns to be influenced by sunspots. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: F3; F4.