Journal of International Money and Finance 25 (2006) 125e145 www.elsevier.

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Currency crises and institutions

Pattama L. Shimpalee a, Janice Boucher Breuer b,*
b a Faculty of Economics, Chiang Mai University, Chiang Mai 52000, Thailand Department of Economics, Moore School of Business, University of South Carolina, Columbia, SC 29208, USA

Abstract This study furthers recent literature on currency crises and institutions. The main objective is to reevaluate the causes of currency crises by focusing on the role played by a broader array of institutional factors and crisis episodes than have previously been considered while at the same time controlling for economic factors. Our dataset consists of over 30 countries covering 13 institutional factors for the period 1984e2002. Two questions are addressed. They are (1) what mix of institutions may contribute to or set the stage for a currency crisis? and (2) what mix of institutions may affect the depth of currency crises as measured by a decline in output? Our ndings reveal that institutional as well as economic factors affect the probability of currency crises and that worse institutions are associated with bigger contractions in output during the crisis. In general, our strongest results regarding institutions show that corruption, a de facto xed exchange rate regime, weak government stability, and weak law and order increase the probability of a currency crisis. We nd mixed evidence that deposit insurance, the removal of capital controls, a lack of central bank independence, nancial liberalization, and civil law increase the chance of crisis. We nd a similar set of factors worsens the contraction in output during a crisis except for deposit insurance, which we nd moderates the contraction in output. 2005 Elsevier Ltd. All rights reserved.
JEL classication: F3; F4 Keywords: Currency crises; Institutions

* Corresponding author. Tel.: 1 803 777 7400/7419. E-mail address: boucher@moore.sc.edu (J.B. Breuer). 0261-5606/$ - see front matter 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.jimonn.2005.10.008

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1. Overview of the issue Are currency crises ordinary events? A review of international monetary history seems to suggest perhaps so. From 1972e2002, there have been 169 currency crises across 56 countries.1 Currency crises have occurred in all but three of those years and have shocked developing, emerging, and developed countries alike, with the most recent examples being the Argentine crisis of 2001e2002 and the Turkish crisis of 2001e2002. No country seems immune and indeed, the media portrays the United States as poised for its own currency crisis. By denition, crises are bad outcomes. In economic terms, crises take a toll on countries in terms of reduced income and increased unemployment. Corporate balance sheets are adversely affected and bankruptcies may occur. Banks may become illiquid or worse, insolvent. Payments of households and businesses become onerous and credit becomes circumscribed. Economic growth is interrupted. As well, political and social unrest may be ignited. All in all, citizens suffer. The economic, nancial, political, and social fallout a currency crisis brings make understanding their causes critical. A proliferation of theoretical and empirical papers investigating the causes and consequences of crises as well as how to guard against them has been sparked by the cluster of currency crises since the mid-1990s. Indeed, there has been much work devoted to predicting crises.2 Culling extant studies of currency crises, a shortlist of economic factors contributing to currency crises emerges. These include real exchange rate overvaluation, a lack of foreign reserve adequacy relative to short-term debt or broad money, domestic credit growth, current account decits, poor export growth, and declining foreign reserves. While these studies show poor macroeconomic fundamentals as causes of currency crises, they leave open the question of the role of institutions. Weak institutions may contribute to poor macrofundamentals and hence predispose a country to sudden stops of capital. It is also possible that institutions, in addition to macroeconomic fundamentals, may contribute to crises. In two related papers, Alesina and Wagner (2003) and Calvo and Mishkin (2003) consider the quality of institutions and exchange rate arrangements. Alesina and Wagner (2003) found that countries with poor institutional quality related to the business environment and the socio-political environment, have difculty in maintaining an announced peg and are more likely to abandon it. Calvo and Mishkin (2003), in re-assessing the debate over xed versus oating exchange rates, argue that deeper institutional features relating to scal stability, nancial stability, and price stability are more important to macroeconomic stability and the avoidance of crises than the exchange rate regime, per se. This study furthers the literature on currency crises and institutions. The main objective is to re-evaluate the causes of currency crises by focusing on the role played by a broader array of institutional factors and crisis episodes than have previously been considered, while controlling for economic factors. Since good macroeconomic performance and good institutions often go hand in hand, it is important to control for economic factors in order to correctly estimate the

Calculations based on Bordo et al. (2001) and updated by authors. Contributions in this vein include Eichengreen et al. (1995), Sachs et al. (1996), Frankel and Rose (1996), Goldfajn and Valdes (1997), International Monetary Fund (1998), Milesi-Ferretti and Razin (1998), Berg and Pattillo (1999), Bussiere and Mulder (1999), Kaminsky and Reinhart (1999), Rossi (1999), Aziz et al. (2000), Edison (2000), Goldstein et al. (2000), Hawkins and Klau (2000), Johnson et al. (2000), Osband and Van Rijckeghem (2000), Kamin et al. (2001), Block (2002), Ghosh and Ghosh (2002), Kumar et al. (2002), Martinez-Peria (2002), and Mulder et al. (2002).
2

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contribution of institutions to currency crises. Our dataset consists of over 30 countries covering 13 institutional factors for the period 1984e2002. Two questions are addressed. They are (1) what mix of institutions may contribute to or set the stage for a currency crisis, controlling for macroeconomic factors? and (2) what mix of institutions may affect the depth of currency crises as measured by a decline in output, controlling for macroeconomic factors? Along the way, we offer hypotheses relating institutions to currency crises. Our ndings reveal that institutional as well as economic factors affect the probability of currency crises and that worse institutions are associated with bigger contractions in output during the crisis. In general, our strongest results regarding institutions show that corruption, a de facto xed exchange rate regime, weak government stability, and weak law and order increase the probability of a currency crisis. We nd ambiguity over deposit insurance e in some cases, deposit insurance increases the probability of currency crises and in others, reduces it. We nd mixed evidence that the removal of capital controls, a lack of central bank independence, nancial liberalization, and civil law increase the chance of crisis. We nd little evidence that bureaucratic quality, ethnic tensions, external conict, and internal conict are important factors in currency crises. We nd a similar set of factors worsens the contraction in output during a crisis except for deposit insurance, which we nd moderates the contraction in output. The outline of the paper is as follows: Section 2 reviews the literature on currency crises, paying particular attention to the latest work on institutions. Section 3 presents the data and the estimation methodology. Section 4 presents the empirical results. Section 5 offers concluding remarks and directions for future work. 2. Background on models of currency crises The question of what causes crises has been addressed with sequential generations of models developed largely along historical lines e rst, to explain the sovereign debt crisis of Latin America, next to explain the European and Mexican crises, and on to explain the Asian crisis.3 In rst generation models, poor macroeconomic fundamentals incite speculative capital outows, which in turn generate a currency crisis. In second generation models, speculative capital outows are triggered when announced policy and the credibility that it can be maintained are called into question. Third generation models are based on a boom/bust (overlending/overborrowing) cycle and model currency crises as co-terminus with banking crises. Fourth generation models are relatively new and introduce institutional factors (elsewhere termed social capital, social infrastructure, deep determinants) as determinants of currency crises. In these models, weak institutions worsen problems associated with risk and uncertainty and contribute to a misallocation of resources thereby setting the stage for currency crises. Rajan and Zingales (1998) consider contract enforcement and the opportunity for malfeasance; Bussiere and Mulder (1999) examine, e.g. political factors such as divisive and polarized parliaments; Rossi (1999) considers capital account openness, bank supervision, and depositor safety; Johnson et al. (2000) consider a number of variables including rule of law, judicial efciency, and corruption; Li and Inclan (2001) consider central bank independence, coordinated wage bargaining, stock-market development, and more; Acemoglu et al. (2002) consider constraints on the executive branch; Block (2002) considers the strength of the government, Ghosh and
3

See Breuer (2004) for a review.

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Ghosh (2002) consider governance, rule of law, creditor and shareholder rights; and Mulder et al. (2002) consider among other factors, the legal regime, contract enforcement, and accounting standards. Generally speaking, institutions affect currency crises through two causal mechanisms (Li and Inclan, 2001). First, institutions tend to have an impact and correlate with the health of the national economy. Therefore, institutions that lead to bad economic fundamentals may contribute to currency crises whereas institutions that help produce good economic fundamentals remove one reason for currency crises to occur. Second, institutions are informative. Institutions signal market agents about future economic fundamentals, and can thereby shape market expectations. Consequently, institutions that correlate with bad economic fundamentals destabilize market expectations, increase market uncertainty about the likelihood of currency crisis, and make currency crises motivated by speculative capital outows more likely. On the other hand, institutions that correlate with good economic conditions stabilize market expectations, reduce market uncertainty about the probability of currency crisis, and make speculative capital outows less likely. 3. Data, hypotheses, and estimation methodology We next present a set of hypotheses and an empirical model relating institutions to the probability of currency crises and the depth of contraction in output suffered during them. We then discuss the data. 3.1. Hypotheses on institutional variables Table 1 presents the 13 institutional variables considered in our study. The third column of the table presents the hypothesized (directional) effect of these institutions on the probability of a currency crisis. We briey summarize the institutions and offer hypotheses about each. 3.1.1. Bureaucratic quality Bureaucratic quality measures the strength and quality of civil service and bureaucrats and how able they are to manage political problems without interruption of services.4 A higher level of bureaucratic quality means that government services and policies are less likely be interrupted and/or altered and that agencies are less likely to be inuenced by political pressure. Consequently, there will be less uncertainty with respect to the conduct of government and less uncertainty with respect to economic outcomes. With less uncertainty, capital outows may not be as subject to panic and herding. Thus, currency crises may be less likely to arise with greater bureaucratic quality. Since a higher index value indicates greater bureaucratic quality, the expected sign of bureaucratic quality is negative. 3.1.2. Government stability A higher level of government stability means that a government is more likely to be able to continue its announced programs and to stay in ofce. Factors such as type of governance, the command of the legislature, and popular approval of policies are considered.4 Government stability consequently leads to less uncertainty as to what government policy toward businesses
4

Source: International Country Risk Guide. PRS Group.

P.L. Shimpalee, J.B. Breuer / Journal of International Money and Finance 25 (2006) 125e145 Table 1 Institutional variables: hypotheses and data sources Variable Index value Effect on probability of currency crisis or depth of contraction Negative Negative Negative Negative Negative Negative Negative Ambiguous Data source

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Frequency

Bureaucratic quality Government stability Absence of corruption Law and order Absence of ethnic tensions Absence of external conict Absence of internal conict Exchange rate regime Capital controls

0e4, Higher values better bureaucratic quality 0e12 Higher values more government stability 0e6, Higher values less corruption 0e6, Higher values more law and order 0e6, Higher values less ethnic tensions 0e12, Higher values less conict 0e12, Higher values less conict 0, 1 Where 1 xed rate regime 0, 1 Where 1 capital controls

Ambiguous

Central bank independence Deposit insurance Financial liberalization Legal origin

0e1 Where 1 maximum independence 0, 1 Where 1 deposit insurance Proxied by the real interest rate on deposits 0, 1 Where 1 civil law

Negative Ambiguous Ambiguous

International Country Risk Guide International Country Risk Guide International Country Risk Guide International Country Risk Guide International Country Risk Guide International Country Risk Guide International Country Risk Guide Reinhart and Rogoffs (2002) de facto exchange rate regime Annual report on exchange rate arrangements and restrictions, IMF Cukierman (1992) and Cukierman et al. (1992) Barth et al. (2001) Constructed from International Financial Statistics La Porta et al. (1998)

Monthly Monthly Monthly Monthly Monthly Monthly Monthly Annual

Annual

By country By country Monthly

Ambiguous

By country

(banking and non-banking) will be in the future. With less uncertainty, there is less likely to be a misallocation of resources and associated inefciencies. So, government stability strengthens the economy. Thus, a higher degree of government stability is less likely to lead to capital ight and thus it is less likely that currency crises will arise. Also, with a higher degree of government stability and therefore less uncertainty, panic selling of currency may be less likely to arise. Since a higher index value indicates more government stability the expected sign of government stability is negative.5 3.1.3. Corruption Corruption includes the demand for bribes connected with import and export licenses, exchange controls, tax assessments, police protection and loans. It also includes nepotism and cronyism.4 Higher levels of corruption are more likely to lead to inefcient economic decisions
5 Since a higher index value for government stability may also be associated with autocratic regimes and an absence of democracy and voice, it is possible that the expected sign could be positive.

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and to a greater misallocation of resources. Inefciencies and misallocation of resources put the economy at greater risk for suffering poor economic outcomes (be it in the banking sector, manufacturing sector, government sector, export and import sector, etc.). Since poor economic outcomes lead to capital ight, higher levels of corruption may increase the likelihood of currency crises. Corruption can also make more uncertain the outcome of contracts and transactions which may increase the propensity for panic selling of assets. Since a higher index means less corruption, the expected sign of corruption on the probability of currency crises is negative. 3.1.4. Law and order Law and order measures the strength and impartiality of the legal system and popular observance of the law.4 A higher degree of law and order means that not only is there greater observance of the law by the populace but also that the judicial system is fair and impartial. Thus, a higher degree of law and order also implies less uncertainty in all types of transactions. Contractual obligations are more likely to be fullled according to the terms of the agreement and the judicial system is more likely to settle cases fairly. By reducing uncertainty in transactions, there is less likely to be a misallocation of resources and fewer inefcient outcomes. Thus, law and order strengthens an economy in ways that may not be directly observable in macroeconomic performance and makes it less likely to be subject to capital ight and currency crises. Since a higher number indicates higher observance of law and order, the expected sign of law and order is negative. 3.1.5. Ethnic tensions Ethnic tensions are attributed to racial, nationality, or language division and gauge how intolerant groups might be to compromise.4 Ethnic tensions may affect the way in which contractual agreements between two parties of different ethnic backgrounds are arranged as well as how likely they are to be abided. Ethnic tensions thus raise the level of uncertainty in the economy for all types of transactions related to commerce, borrowing and lending, government policy toward business, and so on, particularly in principal-agent relationships. A higher level of ethnic tensions may thus increase the level of uncertainty in business and nancial transactions. This may lead to inefcient outcomes and/or outcomes that have a negative impact on the economy. Thus, capital ight and consequently currency crises may be more likely to arise in countries with greater ethnic tensions. Since a higher number indicates lower ethnic tensions, the expected sign of this coefcient is negative. 3.1.6. External conict External conict ranges from trade restrictions and embargoes to geopolitical disputes to incursions, insurgencies, and warfare. A higher level of external conict means that there is more uncertainty in international transactions with the domestic country. A higher level of external conict thus may make a country more subject to capital ight and more likely to experience currency crises. Since a higher index means lower external conict, the expected sign of this coefcient is negative. 3.1.7. Internal conict Internal conict is based on the extent of political violence toward the incumbent. A higher level of internal conict reduces the willingness of parties to abide by contracts and heed property rights and thus raises the level of uncertainty in all types of transactions. A higher level of

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uncertainty leads to more inefcient outcomes and a greater misallocation of resources which can weaken the economy. This can cause capital ight. The higher level of uncertainty can also make capital ight more likely. Thus, currency crises may be more likely the higher the level of internal conict. Since a higher index indicates lower internal conict, the expected sign of this coefcient is negative. 3.1.8. Exchange rate regime In the aftermath of the recent nancial crises, a view emerged that the exchange rate regime was in part responsible for the likelihood and the depth of these crises. In other words, a number of emerging market economies have experienced devastating nancial crises and macroeconomic turbulence because they had kept exchange rates xed. It is possible that an exchange rate peg may encourage borrowers to ignore exchange rate risk. Thus, a xed exchange rate regime may contribute to macroeconomic instability and hence currency crises. A counterargument is that a xed exchange rate regime promotes monetary discipline and thus improves long run macroeconomic performance and helps stabilize expectations. We code xed exchange rate regimes with a 1, and 0 otherwise; however, the expected sign on this coefcient is ambiguous. 3.1.9. Capital controls The classic view such as Greenwald et al. (1984), Quirk and Evans (1995), and Cooper (1998) argues that free capital mobility enhances a more efcient allocation of resources raising welfare in the process. Controls on inows seem to hamper economic performance. Thus, capital controls may predispose a country to currency crisis. On the other hand, McKinnon and Pill (1997) argue that it is also possible that the absence of controls encourages overlending and overborrowing which can put a country at risk for a currency crisis. Thus, the expected sign of capital controls is ambiguous. We code controls on capital account transactions, or restrictions on capital movements, especially inows with a 1, and 0 otherwise. 3.1.10. Central bank independence Central bank independence may improve real economic performance and the avoidance of currency crises for several reasons. For example, an independent central bank that is free from political pressure may behave more predictably, promoting economic stability and reducing a risk premium in real interest rates. Moreover, to the extent that high ination has adverse effects on economic performance by creating distortions, encouraging rent seeking activity, or raising a risk premium, one would expect central bank independence to improve economic performance. In other words, central bank independence leads to lower ination rates and greater price stability; it contributes to the long run health of national economy and removes one important cause of speculative attacks against ones currency. Thus, the more independent a central bank, the lower the probability of currency crises. Therefore, the expected sign of central bank independence is negative. We use the index of legal central bank independence taken from Cukierman (1992), and Cukierman et al. (1992). It is coded on a scale between 0 and 1 where 0 stands for the minimum level of independence and 1 for the maximum level. 3.1.11. Deposit insurance The effect of deposit insurance on currency crises is ambiguous. On the one hand, deposit insurance offered to banks reduces the downside risk of depositor losses and hence banking crises which in turn, decreases the probability of currency crises. On the other hand, deposit insurance offered to banks can set the stage for overborrowing/overlending which can lead to

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currency crises. Since we code countries with explicit deposit insurance protection systems with a 1, and 0 otherwise, the expected sign of deposit insurance is ambiguous. 3.1.12. Financial liberalization There are different opinions about the role of nancial liberalization in currency crises. Some argue that nancial liberalization increases the allocation efciency of the nancial sector laying the foundation for sounder macroeconomic fundamentals. Consequently, nancial liberalization should reduce the likelihood of currency crises. Others argue that nancial liberalization, by encouraging competition in the nancial sector, can lead to imprudent lending practices which lower the stability of the banking and corporate sectors and thus make currency crises more likely. Consequently, the effect of nancial liberalization on currency crises is ambiguous. We use a real interest rate as a proxy for nancial liberalization as in Rossi (1999). The real interest rate can be interpreted a proxy for nancial liberalization since real interest rates are usually lower, or negative, in repressed nancial systems (Rossi, 1999). 3.1.13. Legal origin La Porta et al. (1998) argue that civil law countries afford less protection to creditors and shareholders and thus increase nancial sector instability and the propensity for currency crises. On the other hand, in civil law countries, judicial decisions are determined according to a codied set of laws whereas in common law countries, cases are decided on precedent. Thus, civil law countries may reduce risk and uncertainty and thus indirectly reduce the likelihood of currency crises. Consequently, the effect of legal origin (civil law) on currency crises is ambiguous. Countries with a civil law system are coded as 1 and common law countries as 0. The hypotheses relating institutions to the probability of currency crisis are the same regarding the depth of the currency crisis. That is, a worse set of institutions should correspond to larger contractions in output during crisis. 3.2. Estimation methodology The two questions we raised in Section 1 require different estimation strategies be employed. To answer the rst question relating institutional factors to the probability of a currency crisis, we use a multivariate probit. The basic equation is: Pr Currency Crisisi;t 1 FXi;t1 b; 1 where Pr (Currency Crisisi,t) denotes the probability of a currency crisis in month t in country i, and takes a value of 1 at the onset of the crisis and 0 otherwise. Xi, t1 is a vector of explanatory variables (at time t 1) partitioned to include economic factors and institutional factors; F is the standard cumulative normal distribution. The panel of countries used in estimating Eq. (1) includes those that experienced one or more crises over the sample period as well as some that did not experience any crisis over the entire period. Consequently, we control for heteroskedasticity and report heteroskedastic-consistent p-values. The second question we address is whether economic and institutional factors systematically affect the depth or severity of a currency crisis. To answer it, a measure of the depth or severity of a currency crisis must be constructed. We measure the depth of the crisis (DC) by an index of a trend forecast of output (per capita) relative to actual output using annual instead of monthly data. Increases in DC thus imply an increase in the depth of the crisis and allow us to interpret

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the coefcients on the institutional variables similarly to those hypothesized for the probability of crisis. The equation we use is: DCi;t b0 b1 X1;i;t1 b2 X2;i;t1 wi;t ; 2

where DCi,t is the depth of the crisis. The subscripts i and t indicate the country and the crisis number for that country. For example, there are four crises in Indonesia in November 1978, April 1983, September 1986, and August 1997. Thus, DCi,4 would indicate the fourth crisis for country i. Note that since crisis events are not uniformly distributed over time, the t subscript is not an indicator of time (e.g. months or years). Thus, the data no longer have a time-series dimension. Moreover, the panel used in estimating Eq. (2) includes only countries that have suffered a currency crisis. X1,i,t1 is a vector of economic variables and X2,i,t1 is a vector of institutional variables. The set of explanatory variables is the same as the set used for the probit models. In order to test empirically the connection between institutional variables and the depth of a currency crisis, controlling for economic factors, we estimate several specications that differ in their treatment of the error term. First, we use ordinary least squares (OLS). This is the simplest treatment and does not admit the possibility that there are country-specic effects or that the error terms across crises may be correlated. To account for the possibility that the depth of the crises may differ by country, we use two estimation methodologies that introduce country-specic effects. These are the random effects estimator (RE) and the between estimator (BE), respectively. We cannot use xed effect estimation since several of our institutional variables are country-specic. Third, we re-estimate Eq. (2) using what is best described as pseudo seemingly unrelated regression (SUR). SUR estimation has the advantage of allowing error terms across observations to be correlated. In our case, we allow the error terms across crises within a country to be correlated, rather than at a point in time as is usual with standard SUR applied to panel data. The estimation strategy is not a straightforward application of SUR for a few reasons. First, the data on the depth of the currency crises are neither cross-sectional nor time series. The data are observations on the size of the contraction in trend forecast of output per capita relative to actual output per capita during a crisis. Since countries historical experience with crises differs by date and number, these data do not have a true time-series dimension. Second, in the estimation, we restrict the coefcient estimates to be identical across countries and crisis events. Standard SUR with panel data permits the coefcient estimates to differ by cross-sectional unit. Lastly, because the methods above may suffer from sample selection since only crisis episodes were included in the estimation, we apply Heckmans two-step selection across both crisis and non-crisis episodes.6 Naturally, this dramatically increases the sample size since there are many years in which no crises are experienced by countries. In all estimations, heteroskedasticity has been corrected. 3.3. Data Our data consist of monthly (and annual) observations from January 1984 to December 2002 for 35 or 44 countries, depending on data availability and the method used to date the crises, discussed below. The starting date for the sample period was constrained by data availability on
6

We thank Roberto Rigobon for suggesting this.

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some institutions. Institutional variables are drawn from several sources as listed in Table 1. The economic data are from the IMFs International Financial Statistics CD-ROM. A few points about the data are worth noting. First, we identify a currency crisis using three alternative techniques. Currency crises are identied following Eichengreen et al. (1995), Kaminsky and Reinhart (1999), and Frankel and Rose (1996). Eichengreen et al. (1995) use an index computed from a weighted average of exchange rate changes, interest rate changes, and foreign reserve changes to identify crises whereas Kaminsky and Reinhart (1999) use a weighted average of exchange rate changes and foreign reserve changes. Frankel and Rose (1996) use an index based on exchange rate changes only. Each of the techniques requires constructing an index of speculative exchange market pressure based on (log) exchange rate changes, (log) foreign reserve changes, and/or interest rate changes. When the index breaches a threshold value, the start date of a crisis episode (date) is identied. Since the exact identication of crisis start dates is not always the same across techniques, we present results for all three dating procedures.7 Second, the data on institutions from International Country Risk Guide are index values where, in all cases, higher index values are associated with better institutions. For example, the higher the score on corruption, the less corruption there is. The same applies to the data on ethnic tensions, internal conict, and external conict. This is why we have modied these variable names in Table 1 with the term absence of. . Third, the exchange rate regime classication we use is the de facto classication produced by Reinhart and Rogoff (2002) instead of the IMFs de jure classication. The IMF classication may misrepresent exchange rate arrangement type because it is based on the arrangement type countries self-report to the IMF. These may be different from the exchange rate regime countries maintain in practice. Reinhart and Rogoffs data attempt to adjust for this problem.8 Fourth, eight macroeconomic variables are also included in the estimation to control for macroeconomic factors that may contribute to a currency crisis independent of institutional factors. The economic control variables included are domestic credit/real GDP, exports/real GDP, foreign reserves/real GDP, the ination rate, M2/foreign reserves, the real exchange rate, the trade balance/real GDP, and the U.S. interest rate. 4. Currency crises and institutions: empirical results In this section, the effects of institutions are measured in two dimensions e on the probability of currency crisis, and on the depth of contraction in output during the crisis. We turn to each of these next. 4.1. Institutions and the probability of currency crisis Tables 2e4 report results of the probit analysis applied to Eq. (1) using the three different techniques for identifying currency crises (discussed in Section 3.3). We report results across all
7 Using Eichengreen et al. (1995), we identify 67 crisis episodes across 11 countries in Asia, 15 in Europe, and 9 in the Latin America; with Kaminsky and Reinhart (1999), we identify 68 episodes across 11 countries in Asia, 16 in Europe, and 17 in the Latin America; and with Frankel and Rose (1996), we identify 55 episodes across 11 countries in Asia, 16 in Europe, and 17 in the Latin America. 8 Based on Kaminsky and Reinharts crisis identication method, we identied 55 crisis episodes under a xed exchange rate regime and 13 crisis episodes under a oating rate regime.

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Table 2 Probit estimates of probability of currency crisis, January 1984eDecember 2002 (Eichengreen et al. (1995) method) Variable Full modela (1) Bureaucratic quality Government stability Absence of corruption Law and order Absence of ethnic tensions Absence of external conict Absence of internal conict Exchange rate regime Capital controls Central bank independence Deposit insurance Financial liberalization Legal origin Number of countries Number of crises Number of observations Pseudo R2 0.115 (0.281) 0.051* (0.067) 0.074** (0.023) 0.067** (0.039) 0.023 (0.694) 0.036 (0.344) 0.019 (0.331) 0.301* (0.058) 0.316* (0.098) 0.076 (0.209) 0.196* (0.090) 0.004 (0.521) 0.349* (0.094) 35 67 7980 0.406 Models excluding some variablesa (2) e 0.046* (0.071) 0.049** (0.045) 0.055** (0.046) 0.020 (0.743) 0.037 (0.321) 0.015 (0.338) 0.256 (0.071) 0.326* (0.087) 0.053 (0.341) 0.195* (0.090) 0.003 (0.521) 0.311 (0.126) 35 67 7980 0.393 (3) 0.111 (0.290) 0.053* (0.066) 0.077** (0.023) 0.061** (0.044) e 0.038 (0.309) 0.012 (0.429) 0.312* (0.042) 0.309* (0.103) 0.079 (0.188) 0.210* (0.087) 0.002 (0.527) 0.325* (0.104) 35 67 7980 0.384 (4) 0.094 (0.363) 0.053* (0.066) 0.101** (0.015) 0.065** (0.039) 0.031 (0.560) 0.032 (0.408) e 0.240* (0.074) 0.235 (0.206) 0.068 (0.260) 0.097* (0.098) 0.001 (0.547) 0.271 (0.187) 35 67 7980 0.377 (5) e 0.048* (0.074) 0.051** (0.041) 0.051** (0.052) e 0.039 (0.296) 0.008 (0.534) 0.266* (0.068) 0.320* (0.091) 0.056 (0.308) 0.123* (0.095) 0.004 (0.521) 0.293* (0.135) 35 67 7980 0.382 (6) e 0.048* (0.074) 0.079** (0.020) 0.069** (0.039) 0.032 (0.550) 0.033 (0.386) e 0.204* (0.086) 0.245 (0.186) 0.049 (0.383) 0.125* (0.095) 0.004 (0.520) 0.240 (0.229) 35 67 7980 0.371 (7) e 0.044* (0.082) 0.078** (0.020) 0.075** (0.025) e 0.029 (0.442) e 0.178* (0.010) 0.243 (0.190) 0.041 (0.447) 0.124* (0.095) 0.001 (0.560) 0.267 (0.170) 35 67 7980 0.335

Note: currency crises are identied using the Eichengreen et al. (1995) method and takes a value of 1 at the start of crises. The table reports probit slope derivatives multiplied by 100. Numbers in parentheses are p-values. A dash (e) denotes the variable was dropped from the analysis. *Signicant at the 10% marginal signicance level; **signicant at the 5% marginal signicance level; ***signicant at the 1% marginal signicance level. a Eight macroeconomic control variables (see Section 3.3) and year dummies are included in the estimation but not reported. See also Footnote 9.

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Table 3 Probit estimates of probability of currency crisis, January 1984eDecember 2002 (Kaminsky and Reinhart (1999) method) Variable Full modela (1) Bureaucratic quality Government stability Absence of corruption Law and order Absence of ethnic tensions Absence of external conict Absence of internal conict Exchange rate regime Capital controls Central bank independence Deposit insurance Financial liberalization Legal origin Number of countries Number of crises Number of observations Pseudo R2 0.025 (0.735) 0.054** (0.028) 0.086 (0.162) 0.037** (0.035) 0.013 (0.750) 0.001 (0.981) 0.035 (0.270) 0.011** (0.052) 0.058 (0.671) 0.105* (0.077) 0.060** (0.048) 0.019 (0.879) 0.067* (0.055) 44 68 10,032 0.410 Models excluding some variablesa (2) e 0.056** (0.023) 0.094* (0.096) 0.040** (0.030) 0.014 (0.745) 0.001 (0.979) 0.034 (0.276) 0.009* (0.055) 0.047 (0.723) 0.112* (0.065) 0.068* (0.045) 0.022 (0.860) 0.054* (0.068) 44 68 10,032 0.409 (3) 0.026 (0.731) 0.054** (0.029) 0.082 (0.172) 0.039** (0.035) e 0.000 (0.993) 0.037 (0.219) 0.011** (0.053) 0.066 (0.623) 0.105* (0.077) 0.046** (0.052) 0.010 (0.934) 0.054* (0.068) 44 68 10,032 0.409 (4) 0.021 (0.773) 0.051** (0.037) 0.094 (0.123) 0.029** (0.047) 0.026 (0.527) 0.006 (0.809) e 0.017** (0.050) 0.036 (0.788) 0.104* (0.077) 0.034* (0.072) 0.004 (0.957) 0.092** (0.035) 44 68 10,032 0.394 (5) e 0.056** (0.023) 0.091* (0.102) 0.042** (0.032) e 0.000 (0.992) 0.037 (0.223) 0.009* (0.056) 0.056 (0.673) 0.121** (0.052) 0.053* (0.057) 0.013 (0.915) 0.040* (0.071) 44 68 10,032 0.407 (6) e 0.052** (0.031) 0.100* (0.072) 0.032** (0.040) 0.262 (0.525) 0.006 (0.813) e 0.011** (0.052) 0.027 (0.837) 0.108* (0.075) 0.068** (0.045) 0.001 (0.993) 0.080** (0.043) 44 68 10,032 0.393 (7) e 0.051** (0.033) 0.094* (0.085) 0.047** (0.030) e 0.008 (0.758) e 0.011** (0.052) 0.039 (0.766) 0.107* (0.077) 0.060* (0.095) 0.024 (0.844) 0.056* (0.072) 44 68 10,032 0.386

Note: currency crises are identied using the Kaminsky and Reinhart (1999) method and takes a value of 1 at the start of crises. The table reports probit slope derivatives multiplied by 100. Numbers in parentheses are p-values. A dash (e) denotes the variable was dropped from the analysis. *Signicant at the 10% marginal signicance level; **signicant at the 5% marginal signicance level; ***signicant at the 1% marginal signicance level. a Eight macroeconomic control variables (see Section 3.3) and year dummies are included in the estimation but not reported. See also Footnote 9.

Table 4 Probit estimates of probability of currency crisis, January 1984eDecember 2002 (Frankel and Rose (1996) method) Variable Full modela (1) Bureaucratic quality Government stability Absence of corruption Law and order Absence of ethnic tensions Absence of external conict Absence of internal conict Exchange rate regime Capital controls Central bank independence Deposit insurance Financial liberalization Legal origin Number of countries Number of crises Number of observations Pseudo R2 0.077 (0.350) 0.068** (0.019) 0.089** (0.027) 0.050** (0.023) 0.017 (0.713) 0.033* (0.077) 0.059 (0.106) 0.031* (0.085) 0.189 (0.226) 0.029 (0.533) 0.235** (0.044) 0.006* (0.057) 0.243 (0.203) 44 55 10,032 0.407 Model excluding some variablesa (2) e 0.072** (0.012) 0.113*** (0.012) 0.063** (0.015) 0.016 (0.719) 0.032 (0.117) 0.059 (0.111) 0.011* (0.097) 0.158 (0.301) 0.035 (0.452) 0.209* (0.058) 0.004* (0.057) 0.289 (0.120) 44 55 10,032 0.392 (3) 0.076 (0.352) 0.067** (0.020) 0.088** (0.027) 0.052** (0.023) e 0.029 (0.180) 0.056 (0.114) 0.013* (0.094) 0.178 (0.245) 0.030 (0.515) 0.224** (0.051) 0.007** (0.054) 0.225 (0.222) 44 55 10,032 0.404 (4) 0.073 (0.373) 0.062** (0.029) 0.085*** (0.010) 0.027** (0.042) 0.001 (0.986) 0.021 (0.183) e 0.046* (0.074) 0.154 (0.317) 0.014 (0.759) 0.285** (0.033) 0.009** (0.052) 0.206 (0.276) 44 55 10,032 0.384 (5) e 0.071** (0.012) 0.118*** (0.010) 0.064** (0.015) e 0.032* (0.104) 0.056 (0.119) 0.023* (0.097) 0.148 (0.324) 0.036 (0.436) 0.199* (0.060) 0.005* (0.057) 0.270 (0.129) 44 55 10,032 0.370 (6) e 0.066** (0.019) 0.116*** (0.010) 0.014* (0.078) 0.001 (0.973) 0.023 (0.135) e 0.037* (0.080) 0.123 (0.412) 0.019 (0.665) 0.260** (0.039) 0.005* (0.057) 0.251 (0.171) 44 55 10,032 0.360 (7) e 0.066** (0.019) 0.116*** (0.010) 0.015* (0.078) e 0.023 (0.137) e 0.018* (0.092) 0.124 (0.405) 0.019 (0.666) 0.262** (0.039) 0.006* (0.056) 0.252 (0.153) 44 55 10,032 0.348

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Note: currency crises are identied using the Frankel and Rose (1996) method and takes a value of 1 at the start of crises. The table reports probit slope derivatives multiplied by 100. Numbers in parentheses are p-values. A dash (e) denotes the variable was dropped from the analysis. *Signicant at the 10% marginal signicance level; **signicant at the 5% marginal signicance level; ***signicant at the 1% marginal signicance level. a Eight macroeconomic control variables (see Section 3.3) and year dummies are included in the estimation but not reported. See also Footnote 9.

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three strategies as a check on robustness. In each, the sample period covers January 1984eDecember 2002 and the equation is estimated with year dummies and eight economic control variables listed in Section 3.3. The macroeconomic variables are not included in the tables since our focus is on the effect of institutions on the probability of currency crises.9 Table 2 presents the results using Eichengreen et al. (1995)s crisis denition. Table 3 reports results following Kaminsky and Reinhart (1999)s crisis denition, and Table 4 reports results using Frankel and Rose (1996)s crisis denition. Country coverage varies by crisis denition with 35 countries in Table 2 and 44 countries in Tables 3 and 4. In each of the tables, results from seven different specications are shown. The seven different specications are each pared down versions of the full (rst) specication where several variables are excluded from the estimation if they consistently turned out to be statistically insignicant across tables. Model (2) omits bureaucratic quality while model (3) omits ethnic tensions and model (4) omits internal conict. Models (5), (6) and (7) omit bureaucratic quality and ethnic tensions, bureaucratic quality and internal conict, and bureaucratic quality, ethnic tensions, and internal conict, respectively. Overall, the results suggest that controlling for economic factors, several institutions are associated with an increased probability of currency crises. Looking across Tables 2e4, the results uniformly show that corruption, a de facto pegged exchange rate regime, a worsening of government stability and a worsening of law and order increase the probability of a currency crisis.10 These results are robust across the three techniques used to date crises. The results show some differences regarding deposit insurance. Tables 2 and 3 show that deposit insurance reduces the likelihood of a crisis and Table 2 also shows some evidence that capital controls reduce the likelihood of crisis although this result is not uniform across the seven specications. Results from Table 3 also show that the probability of a currency crisis increases with a decline in central bank independence and that civil law countries are more prone to crises than common law countries. In contrast to Tables 2 and 3, Table 4 shows that deposit insurance now raises the probability of a currency crisis. Results from Table 4 also differ from those in Table 2 by adding nancial liberalization as a signicant factor in increasing the probability of a currency crisis. However, the coefcient estimate has the wrong sign. The result may be due to the method used to identify currency crises. The Frankel and Rose (1996) estimation method relies only on a criteria based on exchange rate changes to date currency crisis episodes. Since countries typically employ interest rate increases to defend a currency in crisis, and because the nancial liberalization measure is the real interest rate, it is not surprising that the coefcient is signicant. The negative sign suggests that an interest rate defense can work to reduce the probability of crisis. In all tables and specications, there is not much support for the hypotheses that weak bureaucratic quality, ethnic tensions, external conict, and internal conict increase the probability of currency crises.

9 In Tables 2e4, six of eight economic variables (not reported) are statistically signicant at the 10% level or better. For Table 2, they are the ratio of domestic credit to real GDP, the ratio of exports to real GDP, the ratio of foreign reserves to real GDP, ination rate, the real exchange rate, and the U.S. interest rate. M2/foreign reserves and the trade balance/real GDP is not. For Table 3, M2/foreign reserves and the trade balance/real GDP gain signicance and exports/real GDP and the U.S. interest rate lose signicance. For Table 4, exports/real GDP gain signicance and the trade balance/real GDP loses signicance. 10 Recall that corruption, government stability, and law and order are measured as indexes where increases imply an improvement or better outcome. For example, an increase in the corruption index implies less corruption and thus should reduce the probability of a currency crisis. So, the expected coefcient sign is negative.

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4.2. Institutions and the depth of currency crises Tables 5e7 report results from the estimation of Eq. (2), using the three different techniques for identifying currency crises (discussed in Section 3.3). Because construction of the depth of crisis measure is limited by annual data, results reported in Tables 5e7 are based on annualized observations during crisis episodes only. As discussed in Section 3.3, the data are not panel data. Again, we report results across all three strategies for identifying crises as a check on robustness. In each, the equation is estimated with the same economic control variables (not reported).11 We present results for four different estimation methods applied to Eq. (2). These are OLS, random effects, between effects, and pseudo-SUR which were discussed in Section 3.2. Table 5 presents the results using Eichengreen et al. (1995)s crisis denition. Table 6 reports results following Kaminsky and Reinhart (1999)s crisis denition, and Table 7 reports results using Frankel and Rose (1996)s crisis denition. Overall, the results suggest that controlling for economic factors, many of the same institutions that increase the probability of a currency crisis also increase the depth of the crisis (as measured by a loss in output relative to trend). Looking across Tables 5e7, several institutions are consistently associated with the depth of the crisis. These are corruption, deposit insurance, government stability and law and order. More widespread corruption (measured by a decrease in the corruption index), lower levels of government stability, and lower levels of law and order increase the depth of the contraction in output during the crisis, whereas deposit insurance reduces the size of the contraction. The ndings for deposit insurance further the debate over it; we nd that while deposit insurance increases the probability of a currency crisis, it moderates the loss in output during the crisis. Results from Tables 5 and 6 also show that civil law countries suffer bigger declines in output than common law countries. Tables 5e7 provide modest evidence that countries with more independent central banks suffer smaller contractions in output during crisis. There is also modest evidence that de facto xed exchange rate regimes are likely to experience bigger contractions in output and that capital controls correspond to a smaller loss in output during a crisis. Lastly, there is modest evidence that a lessening of ethnic tensions and internal conict (a rise in the index value) corresponds to a smaller decline in output.

5. Conclusions and directions for future research The last two decades have seen a proliferation of currency crises among countries worldwide with a reinforced interest in them among academicians and policymakers. However, only recently has there been a major shift in focus away from macroeconomic fundamentals toward understanding the deeper institutional determinants of crises. While crises are directly initiated by large scale capital outows, it begs the question what causes large scale capital outows? Risk and uncertainty are certainly fundamental but this only further begs the question what determines risk and uncertainty? The newest research answers with institutions. Institutions are broadly conceived but in general can be framed as economic, nancial, political, legal, or social arrangements, explicit or implicit, that affect expectations, and hence risk and
11

See Section 3.3.

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Table 5 Depth of contraction in output during crises (Eichengreen et al. (1995) method) Variable Full modela OLS Bureaucratic quality Government stability Absence of corruption Law and order Absence of ethnic tensions Absence of external conict Absence of internal conict Exchange rate regime Capital controls Central bank independence Deposit insurance Financial liberalization Legal origin Number of countries Number of observations R2 0.007 (0.606) 0.037* (0.059) 0.018* (0.084) 0.015* (0.077) 0.001 (0.995) 0.001 (0.774) 0.006 (0.286) 0.005 (0.282) 0.015** (0.037) 0.005 (0.954) 0.073** (0.016) 0.002 (0.886) 0.064*** (0.003) 28 67 0.452 Random effects 0.007 (0.543) 0.057** (0.017) 0.017* (0.074) 0.011* (0.090) 0.002 (0.802) 0.005 (0.152) 0.010** (0.040) 0.019* (0.077) 0.020** (0.044) 0.014* (0.064) 0.081*** (0.003) 0.003 (0.821) 0.068*** (0.001) 28 67 0.477 Between effects 0.024 (0.677) 0.016** (0.052) 0.020* (0.077) 0.038* (0.059) 0.004 (0.901) 0.013 (0.345) 0.020 (0.499) 0.021* (0.069) 0.011* (0.080) 0.017 (0.960) 0.023* (0.079) 0.001 (0.610) 0.070*** (0.001) 28 67 0.425 Pseudo-SUR 0.002 (0.866) 0.042** (0.022) 0.030* (0.069) 0.074** (0.024) 0.002 (0.617) 0.007 (0.814) 0.002 (0.532) 0.014 (0.153) 0.007* (0.061) 0.021 (0.762) 0.044* (0.055) 0.009 (0.422) 0.037** (0.044) 28 67 0.439 Heckman selection 0.003 (0.225) 0.046* (0.055) 0.029* (0.083) 0.022* (0.068) 0.002 (0.439) 0.012 (0.846) 0.006 (0.964) 0.011 (0.335) 0.019** (0.040) 0.023** (0.041) 0.087* (0.081) 0.003 (0.241) 0.041** (0.020) 35 665 0.463

Note: dependent variable is a trend forecast of output per capita divided by actual output per capita during crisis episodes. See Sections 3.2 and 3.3 for discussion of data and estimation. Crisis episodes are identied using the Eichengreen et al. (1995) method. *Signicant at the 10% marginal signicance level; **signicant at the 5% marginal signicance level; ***signicant at the 1% marginal signicance level. a Eight macroeconomic control variables (see Section 3.3) are included in the estimation but not reported. See also Footnote 7.

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Table 6 Depth of contraction in output during crises (Kaminsky and Reinhart (1999) method) Variable Full modela OLS Bureaucratic quality Government stability Absence of corruption Law and order Absence of ethnic tensions Absence of external conict Absence of internal conict Exchange rate regime Capital controls Central bank independence Deposit insurance Financial liberalization Legal origin Number of countries Number of observations R2 0.007 (0.300) 0.021** (0.052) 0.045** (0.024) 0.005* (0.091) 0.003 (0.237) 0.003 (0.168) 0.001 (0.491) 0.005 (0.282) 0.006* (0.065) 0.029* (0.083) 0.015* (0.083) 0.007 (0.253) 0.028** (0.016) 38 68 0.471 Random effects 0.004 (0.463) 0.031* (0.062) 0.028** (0.040) 0.004* (0.069) 0.004 (0.239) 0.000 (0.970) 0.002 (0.887) 0.019* (0.077) 0.003 (0.660) 0.037* (0.072) 0.022** (0.046) 0.005 (0.232) 0.033*** (0.013) 38 68 0.548 Between effects 0.013 (0.464) 0.025* (0.065) 0.057** (0.045) 0.013** (0.053) 0.005 (0.343) 0.006 (0.145) 0.004 (0.915) 0.021* (0.069) 0.011 (0.695) 0.016* (0.092) 0.048** (0.038) 0.003 (0.274) 0.034*** (0.011) 38 68 0.490 Pseudo-SUR 0.007 (0.296) 0.028** (0.050) 0.046** (0.020) 0.005* (0.091) 0.001 (0.233) 0.003 (0.163) 0.002 (0.488) 0.014 (0.153) 0.009* (0.063) 0.010 (0.129) 0.017* (0.089) 0.007 (0.249) 0.028** (0.016) 38 68 0.463 Heckman selection 0.004 (0.281) 0.057*** (0.004) 0.051* (0.059) 0.010** (0.053) 0.007 (0.912) 0.001 (0.153) 0.001 (0.932) 0.026* (0.078) 0.002 (0.946) 0.038** (0.036) 0.016* (0.067) 0.007 (0.505) 0.036*** (0.000) 44 836 0.551

Note: dependent variable is a trend forecast of output per capita divided by actual output per capita during crisis episodes. See Sections 3.2 and 3.3 for discussion of data and estimation. Crisis episodes are identied using the Kaminsky and Reinhart (1999) method. *Signicant at the 10% marginal signicance level; **signicant at the 5% marginal signicance level; ***signicant at the 1% marginal signicance level. a Eight macroeconomic control variables (see Section 3.3) are included in the estimation but not reported. See also Footnote 7.

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Table 7 Depth of contraction in output during crises (Frankel and Rose (1996) method) Variable Full modela OLS Bureaucratic quality Government stability Absence of corruption Law and order Absence of ethnic tensions Absence of external conict Absence of internal conict Exchange rate regime Capital controls Central bank independence Deposit insurance Financial liberalization Legal origin Number of countries Number of observations R2 0.011 (0.421) 0.038* (0.089) 0.012*** (0.011) 0.011* (0.078) 0.005 (0.923) 0.002 (0.662) 0.008 (0.864) 0.018* (0.064) 0.002 (0.906) 0.110* (0.096) 0.008* (0.058) 0.006* (0.081) 0.011 (0.621) 31 55 0.422 Random effects 0.008 (0.463) 0.045** (0.053) 0.027** (0.045) 0.015* (0.079) 0.009 (0.897) 0.007** (0.047) 0.004 (0.305) 0.007* (0.073) 0.016* (0.061) 0.075 (0.506) 0.018** (0.024) 0.012* (0.085) 0.018 (0.446) 31 55 0.441 Between effects 0.020 (0.636) 0.054** (0.041) 0.032** (0.037) 0.039** (0.047) 0.003 (0.839) 0.005 (0.548) 0.004 (0.722) 0.009* (0.069) 0.015* (0.075) 0.169 (0.631) 0.014** (0.029) 0.017* (0.079) 0.015 (0.923) 31 55 0.453 Pseudo-SUR 0.029*** (0.011) 0.055* (0.080) 0.017** (0.041) 0.028* (0.065) 0.002 (0.726) 0.004 (0.308) 0.005 (0.186) 0.015* (0.073) 0.005 (0.724) 0.127* (0.093) 0.003* (0.064) 0.001 (0.132) 0.037 (0.572) 31 55 0.419 Heckman selection 0.013 (0.308) 0.065** (0.012) 0.065* (0.059) 0.035** (0.022) 0.005 (0.899) 0.001 (0.578) 0.006 (0.662) 0.020** (0.048) 0.004** (0.809) 0.142** (0.050) 0.007** (0.069) 0.021** (0.032) 0.016 (0.553) 44 836 0.474

Note: dependent variable is a trend forecast of output per capita divided by actual output per capita during crisis episodes. See Sections 3.2 and 3.3 for discussion of data and estimation. Crisis episodes are identied using the Frankel and Rose (1996) method. *Signicant at the 10% marginal signicance level; **signicant at the 5% marginal signicance level; ***signicant at the 1% marginal signicance level. a Eight macroeconomic control variables (see Section 3.3) are included in the estimation but not reported. See also Footnote 7.

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uncertainty, in transactions. Their effects may be heightened for international transactions, making them particularly important to understanding currency crises. We nd the notion institutions matter as plausible and so undertake research that seeks to determine how so with regard to understanding currency crises. We consider 13 institutional factors ranging from law and order to legal origin to ethnic tensions to deposit insurance to central bank independence and investigate their effects on the probability of currency crises. However, we also control for macroeconomic factors which are widely accepted as playing some role in the genesis of crises, or may themselves depend on institutions. We also consider how institutions affect the depth of the contraction in output during a crisis. The set of institutions we consider is longer than in previous studies and we offer hypotheses about each. Our work also covers a wider set of countries ranging from developing to developed and those with xed and oating exchange rates. Our ndings offer evidence that institutions, in addition to macroeconomic factors, do indeed matter to the onset of currency crises and the contraction in output that ensues. Using a multivariate probit analysis, we nd consistent support that the following institutions increase the probability of currency crisis: less stable governments; weak law and order; more widespread corruption; and a de facto xed exchange rate regime. There is some ambiguity over the results regarding deposit insurance which vary with the type of method used to identify crisis episodes. We nd more modest support that capital controls and central bank independence reduce the likelihood of crises, and that civil law countries are more prone to crises. We nd little to no evidence that bureaucratic quality, ethnic tensions, external conict, or internal conict matter to currency crises. Using panel estimation techniques, we nd, for the most part, that these same factors worsen the contraction in output during the crisis, save for deposit insurance which reduces the contraction. Several other questions remain open for future research. First, the out-of-sample performance of the probit models is not tested in this study. This is left for future research. Second, we think it is possible that nonlinearities are important. We wonder whether the breaching of certain threshold levels for institutions, separately or jointly, increases the probability of crisis. Another issue that could be explored is the duration of xed rate systems.12 The importance of economic and institutional factors to explaining how long a country is able to maintain a xed rate may be worthwhile to investigate. Acknowledgements Thanks to participants at the JIMF/CRIF/TAFI conference in San Juan, Puerto Rico and especially to Roberto Rigobon. Research generously supported by a grant from the Center for International Business Education and Research.

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12

See Klein and Marion (1997) and Allsopp (2000).

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