Financial Crises: Explanations, Types, and Implications; by Stijn Claessens and M. Ayhan Kose; imf working Paper 13/28; January 1, 2013

A.   Identification and Dating 

Currency crises,  as they involve large changes in exchange rates, and (related) inflation 

crises, are relatively easy to identify. Reinhart and Rogoff (2009a) distinguish these episodes 

by assigning threshold values for the relevant variables. In the case of currency crises, they 

consider exchange rate depreciations in excess of 15 percent per year as a crisis, while, for 

inflation, they adopt a threshold of 20 percent per year.

20

 A currency crisis is defined in 

Frankel and Rose (1996) as a depreciation of at least 25 percent cumulative over a 12-month 

period, and at least 10 percentage points greater than in the preceding 12 months. The dates 

identified are obviously sensitive to such thresholds used. These thresholds can also be 

universal, specific to the sample of countries under study, or country-specific (as when the 

threshold is adjusted for the country’s “normal” exchange rate variations).  

 

A measurement issue naturally arises when there was no significant adjustment in currency, 

even if there were pressures or attacks. Movements in international reserves or adjustment in 

interest rates can absorb exchange rate pressures and prevent or moderate the fluctuations in 

the rate. However, episodes involving such pressures and/or attacks are also important to 

document and study. To address this, starting with Eichengreen, Rose and Wyplosz (1996), 

different methodologies have been employed. A composite index of speculative pressure is 

often constructed based on actual exchange rate changes, and movements in international 

reserves and interest rates, with weights chosen to equalize the variance of the components, 

thereby avoiding one component dominating the index. Thresholds are then set to date the 

currency events, including both large exchange rate movements and periods of pressure (see 

Frankel and Saravelos (2012) and Glick and Hutchison (2012) for reviews; Cardarelli, 

Elekdag and Kose (2010) for applications).