The Evaluation of Currency Crises in the Iranian Economy (Early Warning System Approach)

Document Type : Research Paper

Authors

1 Researcher of monetary and foreign exchange group, Monetary and Banking Research Institute of Central Bank of Iran.

2 Assistant professor,Research Center of Strategic Studies, judicial research institute, Tehran, Iran.

Abstract

Although currency crises evidently Valy based on size and durability in Iran and developing economies, the crises are similarly influenced by the national and international variables through the channel of foreign exchange market misalignements and BOP unsustainability. In this context, we aim to predict currency crises in Iranian economy. Meanwhile, Lasso Regression Method is applied to evaluate the impact of real sector, monetary and external sectors variables on the currency crises respectively two, one, and the same season of the crises incidence. The results underscore the role of the similar indicators to explain currency crises in Iran. The key indicators, which are empirically recognized, are comprised of the net gross domestic saving, and deficit of banks cash flows in the context of a transmission process that sequentially affects the growth of money base, excess aggregate demand, prices growth, net financial-capital transactions as well as the reduction in the disposable international reserves. The transmission process causes the foreign exchange rate deviations from the PPP and UIP rates. The estimation results also underline the likelihood of the EWS to predict the four currency crises in Iran, which respectively encompass the third quarter of 1372, third quarter of 1377, fourth quarter of 1379, and the second quarter of 1390. Moreover, all four-currency crises are evidently influenced by the external indicators (sanctions, and international oil price shocks) and domestic macroeconomic imbalances that periodically accelerated the unsustainability of foreign exchange market and BOP over the past three decades.

Keywords


Alessi, L., & Detken, C. (2018). Identifying Excessive Credit Growth and Leverage. Journal of Financial Stability, 35, 215-225.
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of Corporate Bankruptcy. The journal of finance, 23(4), 589-609.
Altman, E. I., Marco, G., & Varetto, F. (1994). Corporate Distress Diagnosis: Comparisons Using Linear Discriminant Analysis and Neural Networks (the Italian experience). Journal of banking & finance, 18(3), 505-529.
Bacha, O. I. (1998). Malaysia: From Currency to Banking Crisis. Malaysian Journal of Economic Studies, 35(1/2), 73.
Bastanzad, H., Davoudi, P., Tavakolian, H. (2018). Foreign Exchange Rate Pricing at the Future Contract (Case of I.R. of Iran). Iranian Economic Review, 22(1), 253-293. doi: 10.22059/ier.2018.65364
Berg, A., Borensztein, E., & Pattillo, C. (2005). Assessing Early Warning Systems: How Have They Worked in Practice?. IMF staff papers, 52(3), 462-502.
Boonman, T. M. (2019). Dating Currency Crises in Emerging Market Economies. The North American Journal of Economics and Finance, 49, 273-286.
Borio, C., & Lowe, P. (2002). Assessing the Risk of Banking Crises. BIS Quarterly Review, 7(1), 43-54.
Calvo, G. A. (2003). Explaining Sudden Stop, Growth Collapse, and BOP Crisis: the Case of Distortionary Output Taxes. IMF Staff papers, 50(1), 1-20.
Canbas, S., Cabuk, A., & Kilic, S. B. (2005). Prediction of Commercial Bank Failure Via Multivariate Statistical Analysis of Financial Structures: The Turkish Case. European Journal of Operational Research, 166(2), 528-546.
Cassidy, J. (2010). After the Blowup. New Yorker, 11, 28-33.
Chakraborty, A., Pathak, R., & Shrivastava, A. (2010). The Anatomy Of Financial Crisis: Evidence From The Emerging Markets.
Choudhry, T., & Jayasekera, R. (2014). Returns and Volatility Spillover in the European Banking Industry During Global Financial Crisis: Flight to Perceived Quality or Contagion?. International Review of Financial Analysis, 36, 36-45.
Comelli, F. (2016). Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies. Journal of Banking and Financial Economics, 6(2), 5-22.
Cumperayot, P., & Kouwenberg, R. (2013). Early Warning Systems for Currency Crises: A Multivariate Extreme Value Approach. Journal of international money and finance, 36, 151-171.
Davis, E. P., Karim, D., & Liadze, I. (2011). Should Multivariate Early Warning Systems for Banking Crises Pool Across Regions?. Review of World Economics, 147(4), 693-716.
Di Mauro, F., Hassan, F., & Ottaviano, G. I. (2018). Financial Markets and The Allocation of Capital: The Role of Productivity.
Dragomirescu-Gaina, C., & Philippas, D. (2015). Strategic Interactions of Fiscal Policies in Europe: A Global VAR Perspective. Journal of international Money and Finance, 59, 49-76.
Eichengreen, B., & Arteta, C. (2000). Banking Crises in Emerging Markets: Risks and Red Herrings. University of California, Berkeley, mimeo.
Eichengreen, B., & Portes, R. (1987). The Anatomy of Financial Crises.
Eichengreen, B., & Rose, A. K. (1998). Staying Afloat when the Wind Shifts: External Factors and Emerging-Market Banking Crises (No. w6370). National Bureau of Economic Research.
Eichengreen, B., Rose, A. K., & Wyplosz, C. (1996). Contagious Currency Crises (No. w5681). National Bureau of Economic Research.
Filippopoulou, C., Galariotis, E., & Spyrou, S. (2020). An Early Warning System for Predicting Systemic Banking Crises in the Eurozone: a Logit Regression Approach. Journal of Economic Behavior & Organization.
Frankel, J. A., & Rose, A. K. (1996). Currency Crashes in Emerging Markets: An Empirical Treatment.
Girton, L., & Roper, D. (1977). A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience. The American Economic Review, 67(4), 537-548.
Goldstein, M., Kaminsky, G., & Reinhart, C. (2000). Assessing Financial Vulnerability: An Early Warning System for Emerging Markets (Washington: Institute for International Economics).
Hastie, T., Tibshirani, R., & Friedman, J. (2009). The Elements of Statistical Learning: Data Mining, Inference, and Prediction. Springer Science & Business Media.
Honohan, P. (1997). Banking System Failures in Developing and Transition Countries: Diagnosis and Predictions.
Kaminsky, G., Lizondo, S., & Reinhart, C. M. (1998). Leading Indicators of Currency Crises. Staff Papers, 45(1), 1-48.
Kaminsky, G., Lizondo, S., & Reinhart, C. M. (1998). Leading Indicators of Currency Crises. Staff Papers, 45(1), 1-48.
Kaminsky, G. L., & Reinhart, C. M. (1999). The Twin Crises: the Causes of Banking and Balance of Payments Problems. American economic review, 89(3), 473-500.
Karagiannis, S., Panagopoulos, Y., & Vlamis, P. (2010). Interest Rate Pass-Through In Europe And The Us: Monetary Policy After The Financial Crisis. Journal Of Policy Modeling, 32(3). 323-338.
Kolari, J., Caputo, M., & Wagner, D. (1996). Trait Recognition: An Alternative Approach to Early Warning Systems in Commercial Banking. Journal of Business Finance & Accounting, 23(9‐10), 1415-1434.
Kolari, J., Glennon, D., Shin, H., & Caputo, M. (2002). Predicting Large US Commercial Bank Failures. Journal of Economics and Business, 54(4), 361-387.
Kosmidou, K., & Zopounidis, C. (2008). Measurement of Bank Performance in Greece. South-Eastern Europe Journal of Economics, 1(1), 79-95.
Kruger, M., Osakwe, P. N., & Page, J. (1998). Fundamentals, Contagion and Currency Crises: an Empirical Analysis. Bank of Canada.
Laeven, L., & Valencia, F. (2012). Systemic Banking Crises Database: An Update.
Leshno, M., & Spector, Y. (1996). Neural network prediction analysis: The bankruptcy case. Neurocomputing, 10(2), 125-147.
Manasse, P., & Roubini, N. (2009). “Rules of Thumb” for Sovereign Debt Crises. Journal of International Economics, 78(2), 192-205.
Manthoulis, G., Doumpos, M., Zopounidis, C., & Galariotis, E. (2020). An Ordinal Classification Framework for Bank Failure Prediction: Methodology and Empirical Evidence for US Banks. European Journal of Operational Research, 282(2), 786-801.
Martin, D. (1977). Early Warning of Bank Failure: A Logit Regression Approach. Journal of banking & finance, 1(3), 249-276.
Minsky, H. P. (1992). The Financial Instability Hypothesis. The Jerome Levy Economics Institute Working Paper, (74).
Mishkin, F. S. (1992). Anatomy of a Financial Crisis. Journal of Evolutionary Economics, 2(2), 115-130.
Mishkin, F. S. (2009). Is Monetary Policy Effective During Financial Crises?. American Economic Review, 99(2), 573-77.
Oet, M. V., Bianco, T., Gramlich, D., & Ong, S. J. (2013). SAFE: An Early Warning System for Systemic Banking Risk. Journal of Banking & Finance, 37(11), 4510-4533.
Papadopoulos, S., Stavroulias, P., & Sager, T. (2019). Systemic Early Warning Systems for EU14 Based on the 2008 Crisis: Proposed Estimation and Model Sssessment for Classification Forecasting. Journal of Banking Regulation, 20(3), 226-244.
Pasquariello, P. (2008). The Anatomy of Financial Crises: Evidence from The Emerging Adr Market. Journal Of International Economics, 76(2), 193-207.
Philippas, D., & Siriopoulos, C. (2013). Putting the “C” into Crisis: Contagion, Correlations and Copulas on EMU Bond Markets. Journal of International Financial Markets, Institutions and Money, 27, 161-176.
Pontines, V., & Siregar, R. (2007). The Yen, the US Dollar, and the Trade Weighted Basket of Currencies: Does the Choice of Anchor Currencies Matter in Identifying Incidences of Speculative Attacks?. Japan and the World Economy, 19(2), 214-235.
Sevim, C., Oztekin, A., Bali, O., Gumus, S., & Guresen, E. (2014). Developing an Early Warning System to Predict Currency Crises. European Journal of Operational Research, 237(3), 1095-1104.
Stanford, J. D. (2010). Six Financial Crises: Are There Common Threads. In APEBH Conference: Financial Crises in Historical Perspective, Wellington.
Yu, L., Wang, S., Lai, K. K., & Wen, F. (2010). A Multiscale Neural Network Learning Paradigm for Financial Crisis Forecasting. Neurocomputing, 73(4-6), 716-725.
Razin, A., & Milesi-Ferretti, G. M. (1998). Current Account Reversals and Currency Crises: Empirical Regularities.
Reinhart, C. M., & Rogoff, K. S. (2011). From Financial Crash to Debt Crisis. American Economic Review, 101(5), 1676-1706.
  • Receive Date: 21 October 2020
  • Revise Date: 29 November 2020
  • Accept Date: 07 December 2020
  • First Publish Date: 30 October 2021