05 Res BhanuMurthy

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Summary
Measurement of International Currency

Crises: A Panel Data Approach using
Composite Indices
K V Bhanu Murthy and Anjala Kalsie
The literature on crisis has often developed indices for measurement of crisis. The
indices that have been developed in the earlier studies suffer from three problems:
Conceptually, they include only exchange related variables and not other relevant
variables that are crucial for international trade and international finance.
The extant studies do not use a causal framework as a methodology for the selection of variable.
Empirically, they do not use more evolved statistical tools such as Principal Component Analysis for constructing a composite index.
This paper seeks to measure the international currency crisis of 1997 in Asia. It has
taken the case of the A5 countries in 1997 and has developed a methodology meant to
measure and explain currency crisis. The study has constructed composite indices for
capturing the causes macro-economic and financial as well as an index of crisis. It
uses Jha & Murthys (2006) approach for constructing composite indices. It combines
continuous and discrete approaches for defining and measuring crises and uses India
as a control which enables international and inter-temporal comparisons during
crisis.
An attempt to explain a widespread and complex phenomenon in terms of a single
dependent variable would be incomplete and partial, where the dependent variables
which represents the crisis are themselves a conglomerate of many factors. Since it is a
complex phenomenon, it cannot be represented by one single variable. Moreover, these
variables tend to be correlated.
With the help of two composite indices one for financial variables and another for
macro variables, a fixed effects panel regression model is developed for explaining the
crisis. The paper measures the decomposition effects of causal financial and macro
variables on the crises.
KEY WORDS
International Currency Crises
Composite Index
It has been found that Index of crises consists of exports, exchange rate, and interest
rate. The financial index contains risk rating, domestic financing, and stock traded.
The index of macro variables is based on GDP, capital formation, and budget balance.
Macro index negatively influences crisis while financial index influences crisis positively.
Asian Crises
India as the base country clearly brings out the contrast between crises affected countries and neutral countries with the help of this methodology. The crisis window
shows up very clearly, as it combines a discrete and continuous definition.
Principal Component
Analysis
Finally, the differences amongst the five Asian countries during crises are also brought
out by this methodology.
Panel Regression
VIKALPA VOLUME 38 NO 4 OCTOBER - DECEMBER 2013
13
he 1990s were marked by a number of rather unusual financial and economic crises, such as the
Mexican Peso Crisis of 1994-95 and the Asian Crisis of 1997. While these crises ranged from the garden
variety of currency crises to rather esoteric real estate
bubbles, studies of such crises exhibit empirical and theoretical commonalties. The literature distinguishes three
varieties of financial crises: currency crises, banking crises, and debt crises. The analysis in this study is primarily focused on the currency crises. The task at hand is to
analyse and measure the currency crises in the A5 countries1 during 1997.
A currency crisis is an episode of intense foreign exchange
market pressure. It can be defined simply as an incident
in which a country experiences a substantial nominal
devaluation or depreciation. This criterion, however,
would exclude instances where a currency came under
severe pressure but the authorities successfully defended
it, by intervening heavily in the foreign exchange market,
by raising interest rates sharply, or by both. Extant approaches have sometimes constructed an index of speculative market pressures (Kaminsky, Lizondo, & Reinhart,
1998; Edison, 2000; Goldstein, Kaminsky, & Reinhart,
2000).
The indices that have been developed in the earlier studies suffer from three problems:
1. Conceptually, they include only the exchange-related
variables2 and not the other relevant variables that
are crucial for international trade and international
finance.
2. They do not use causal framework as a methodology
for the selection of variable.
3. Empirically, they do not use more evolved statistical
tools such as Principal Component Analysis for constructing a composite index.
This paper is a part of a larger study that looks into a new
approach to measure and analyse international currency
crises. A crucial part of the study is to develop a set of
new composite indices, for both causal variables and
impacted/dependent variables, so as to correlate them in
a regression framework. These indices are based on a large
number of variables and involve a three-stage procedure,
1
Malaysia, Philippines, Korea, Thailand, and Indonesia.
Weighted average of ER changes, weighted average of RER

changes, Reserves changes, and Interest rate changes.
14
which shall be discussed later.
RATIONALE
An attempt to explain a widespread and complex phenomenon in terms of a single dependent variable would
be incomplete and partial, if the dependent variables
which represent the crisis are themselves a conglomerate
of many factors. Since a crisis is a complex phenomenon,
it cannot be represented by one single variable. Moreover,
the variables tend to be correlated. Thus, the ordinary
regression framework results in the problem of multicollinearity. Therefore, it is necessary to measure the phenomenon of the crisis with the help of composite indices,
which would adequately represent the complex phenomenon. This applies to both the causes and the effects of a
crisis.
Different studies have identified a variety of factors related to crisis. This study conducts a causality test to determine which of these factors are causes and which are
effects. The final selection of variables is done on the basis of an elaborate procedure, which ensures that the variables which are entering in the construction of the index
of crisis are the ones that are theoretically relevant, as
they are drawn from extant studies and are empirically
sound as they are tested for causality. In addition, they
are appropriate because they have been checked for data
redundancy.
CONCEPTUAL ISSUES
Prior Procedure
Several steps were followed as a part of the larger study
to ensure the above considerations:
1. A literature survey of empirical and conceptual studies (Moreno, 1995; Berg & Pattillo, 1999; Frankel &
Rose, 1996) was undertaken on the basis of which a
data set consisting of a large number of crises variables (30 variables including financial and macro variables) could be arrived at.
2. The set of available variables were checked for data
redundancy. Many defined variables in the data set
were different versions of the same variable. The authors used their judgment to drop a certain version
and retain another version. For instance, if a variable
was defined in terms of PPP $, US $ or local currency
units, only one of them was chosen.
MEASUREMENT OF INTERNATIONAL CURRENCY CRISES: A PANEL DATA APPROACH ...
3. A correlation exercise was carried out on these 30 variables. The purpose of this exercise was to establish
that crisis variables were ordinarily correlated3.
4. A dummy variables exercise4 was also undertaken
wherein the data series for six countries for each of the
30 variables were tested to see whether there was any
structural break during 1997 and 1998, which was
the crises window of the Asian currency crisis. However, the prior correlation analysis and dummy variable exercise did not indicate anything about the
causality amongst the variables. The dummy variable
exercise is a univariate analysis that does not capture
the complexity of the phenomenon.
Measurement of Crisis
After having undertaken the above empirical steps, the
authors proceeded with the measurement of crises. The
first part of the measurement exercise consisted of construction and measurement of the indices while in the
second part, these indices were used to model and predict the crises and predict.
ses. On the other hand, the explanatory variables are so

endowed that they are capable of inducing discrete change
in the indicator of crises.
The methodology used in this study captures and measures the discrete change through the independent variable and not through the dependent variable. The
argument is that certain continuous changes can be captured through the causal variables, which lead up to the
crises. This continuous change is manifest in the volatility of the crises variables. In effect, it implies that those
countries which were crises-ridden had experienced a
continuous trend of volatility to the extent that this built
up continuously to discrete change resulting in the crises.
The merit in using a continuous crisis definition lies in
its ability to capture both the continuous influence on the
crises variable (dependent variable) as well as its ability
to explain discrete change which is occurring in the crises variables during crises, due to the causal variable(s).
Crises Window
Crisis Definition
In certain studies, the crisis variable itself has been defined in discrete terms (Eliasson & Krevter, 2000) with the
understanding that the dependent variable had a builtin discrete change or kink. It should not be forgotten that
the dependent variable is an effect. The authors understanding is that whatever change comes in the dependent variable is on account of the causal variables,
including changes in the intercept, because the intercept
also contributes towards the explanatory power of the
equation. In extant literature, the distinction between discrete and continuous crises definition has been captured
through either discrete or continuous dependent variable.
In a causal framework, the mechanism to capture discrete change in the phenomenon has to necessarily rest
upon the causal variables and not the dependent variables. Accordingly, this study follows the methodology
that, the impetus to discrete change, during crises, is
caused by the indicator of the crises and would necessarily come from the causal variables. This methodology has
been tailored in such a manner that it does not pre-suppose the nature of dependent variable that represents cri-
The result of correlation exercise is not reported.
The result of dummy variable exercise is not reported.
The years 1997 and 1998 were taken as the crises window. The crises developed in November 1997 and peaked
in 1998 in many countries. Therefore, neither 1997 nor
1998 could be ignored. This was vindicated by the dummy
variable exercise which showed a significant structural
break across variables during this crises window (Malik,
2008). Some of the extant studies have used monthly data
and defined the crises window in terms of particular
months. As this study was using annual data, it was neither possible to have a crises window that pinpointed the
precise period of crises, nor was there any interest in the
process of the crises. Therefore, the crises window in this
study is defined in annual terms.
Relevance of Control
An important issue of research design was the introduction of a control. In the case of extant studies, with a discrete crises definition, the control was established with
reference to the pre-crises period, since a control is meant
to represent a normal period or normal observation. In
the present study, by control is meant a benchmark
country that was not affected by the crises. For identifying the control, dummy variable exercise was used,
wherein it was found that in the case of India, none of the
relevant variables (those variables which were identified
15
through literature review) were affected by the crises; and

therefore, India was chosen as the control. In other words,
none of the variables showed any structural break, during the crisis period 1997 and 1998, in India. Such an
approach has the advantage of allowing both inter-temporal as well as international comparisons. The extant
studies permit only inter-temporal comparisons (Malik,
2008).
Since India was established as a control, it was reasonable to expect that all the relevant variables would display a normal behaviour in terms of cause and effect.
Hence the causality tests were applied to the relevant
variables only in the case of India.
LITERATURE REVIEW
In view of the complex set of issues involved in the literature review, the discussion is structured in the form of a
table (See Appendix).
METHODOLOGY
The data was taken from the World Development Report
and World Development Indicators (World Bank) for the
years 1987 to 2002. To account for such a conception of
the phenomenon of crises and causes of the phenomenon,
there was a need for evolving an appropriate methodology. The two most desirable features of the methodology
are that, firstly, it should capture the volatility or variance in the relevant variables, because it is this volatility
that leads up to and results in crisis; secondly, it should
enable working with a large number of related variables
because a crisis according to our understanding is a complex phenomenon resulting from a large number of intercorrelated variables.
The third dimension of methodology is that given the constraints of the data point and degree of freedom, the methodology should allow working with a parsimonious set
of variables. The methodology which possesses all these
features is Principal Component Analysis (PCA). Unlike
Ordinary Least Squares (OLS), wherein the procedure is
to minimize the sum of the squares of deviations, in the
case of PCA, the procedure is to maximize the variance.
Another feature of PCA is that it segregates inter-correlated variables into the separate orthogonal factors or principal components. Thirdly, PCA can be used for developing a composite index which collapses a set of variables
into a single variable that represents a complex phenomenon like currency crisis.
16
Procedure of Estimation
The empirical procedure involved five distinct steps:
1. Granger causality test was applied to the data on India in respect of all the relevant variables to identify
the causal variables and those that they impacted. This
was done in case of India, since it was the control.
2. Correlation analysis was used to segregate the variables into impacted or dependent variable and causal
or explanatory or independent variables. Once the variables were separated into dependent and independent variables, independent variables were found to be
correlated.
3. To deal with this problem, Principal Component
Analysis was applied. PCA helped in (a) data reduction and (b) making the dependent variables
uncorrelated.
4. The next step was the formation of a composite index.
It helped in representing the crises phenomenon
which was manifest in a large number of variables.
This is the unique feature of this study.
5. The next step was to specify the model which helped
in merging the two methodological issues, namely
measuring of the crises and comparing the crises-hit
countries with a non-crises hit country. Merging was
done by using panel regression and treating India as
a control.
Causality Test
For developing a causal framework, it is essential to adopt
a procedure by which causal variables can be distinguished from impacted/dependent variables. Once the
set of crises variables are sorted, through this procedure,
it would be possible to develop an index of crisis.
In the true spirit, causality test indicates the precedence
of one variable over the other; it is therefore sometimes
cautioned that the result of such tests may not be interpreted as cause and effect relationship. Here the authors
would like to point out that the present study is not dependent on the Granger Causality Test. After using the
test and sorting the variables as causal and impacted
variables, a structured causal framework was used with
the appropriate regression technique for establishing
cause and effect.
Granger Causality Test: For carrying out the granger causality test, the following two equations were estimated
for all the variables:
Ho: X does not cause Y.

Ho: Y does not cause X.
We test the null hypothesis against an F stat, namely,
F= {(RSSr-RSSur)/m}/ (RSSur/ (n-k))
The degrees of freedom are m and (n-k).
The restrictions are respectively:
ai = 0 and di = 0
Yt = ai Xti + bi Yti + u1t
(1)
Xt= ci Xti + di Yti + u2t
(2)
i =1, 2
RSSr =Residual sum of square restricted
RSSur = Residual sum of square unrestricted
m = Number of linear restrictions
n = Number of observation
k = Number of parameters in the unrestricted regression
hence, no information contained in the points in the event

space is lost. The normality assumption is not essential
in PCA and with such a dispersed set of outcomes, this
feature is useful. PCA is ideally suited because it maximizes the variance rather than minimizing the least square
distance and this study is interested in capturing variance because the authors believe that volatility is the basic cause of a crisis. Since the objective is to develop a
composite Index of Crisis and relate it to two other indices of financial variables and macro variables, there is a
need to choose the essential variables and arrive at relative weights for the purpose of consolidating these variables into a single index. This is facilitated by PCA.
PCA linearly transforms an original set of variables into
a smaller set of uncorrelated variables representing most
of the information in the following form:
(3)
The first principal component is defined such that the
variance of y1 is maximized. Consider the p random variables x1, x2,.. xp subject to the constraint that the sum of
It was also ensured that there was no two-way causality

among the relevant variables. As a consequence of the
causality test, three sets of variables could be identified:
(i) pure causal variable; (ii) pure impacted variable; and
(iii) common variables which alternatively appeared as
causal and impacted variables, although not as two-way
causality.
squared weights is equal to 1, i.e.
Correlation Matrix
optimal weight vector (a11, a12, a1p) and the associated

variance of y1 (which is denoted as 1).
As mentioned earlier, the correlation exercise was done

with a view to sorting the causal and impacted variables.
After identifying the causal and impacted variables,
through the causality test, some variables were found to
be common, that is, they were both impacted as well as
causal variables thus making it difficult to decide which
variables to be selected for constructing an index of crisis.
To solve this problem, correlation matrix was used.
There are two objectives of studying the correlation matrix:
To segregate the set of dependent and independent
variables
To identify a set of crisis variables.
Principal Component Analysis

Principal Components Analysis (henceforth PCA)
(Lewis-Beck, 1994) is based on a linear transformation of
the variables so that they are orthogonal to each other;
. If the vari-
ance of y1 is maximized, then the sum of the squared correlations, i.e.
is also maximized. PCA finds the
If the objective is a simple summary of the information

contained in the raw data, the use of component scores is
desirable. It is possible to represent the components exactly from the combination of raw variables. The scores
are obtained by combining the raw variables with weights
that are proportional to their component loadings. In this
case, the component scores were used for determining
the weight of each of the raw variables in constructing a
composite index. As more and more components are extracted, the measure of the explanatory power increases
but it is necessary to strike a balance between parsimony
and explanatory power.
The goal of PCA is to reveal how different variables change
in relation to each other, or how they are associated. This
is achieved by transforming correlated original variables
into a new set of uncorrelated (orthogonal) underlying
variables (termed principal components) using the
covariance matrix, or its standardized form the correla-
17
tion matrix. The lack of correlation in the principal components is a useful property because it means that the
principal components are measuring different statistical dimensions in the data. The new variables are a linear combination of the original ones and are sorted into
descending order according to the amount of variance
that they account for in the original set of variables. Each
new variable accounts for as much of the remaining total
variance of the original data as possible. Cumulatively,
all the new variables account for 100 percent of the variation. PCA involves calculating the eigen values and their
corresponding eigen vectors of the covariance matrix or
correlation matrix. Each eigen value represents the total
remaining variance that the corresponding new variable
accounts for. The expectation from conducting PCA is
that correlations among original variables are large
enough so that the first few new variables or principal
components account for most of the variance. If this holds,
no essential insight is lost by further analysis or decision-making, and parsimony and clarity in the structure
of the relationships are achieved. Each factor is a combination of variables which are correlated with the principal component.
This methodology has two purposes. As reported early,
both the sets of macro and financial variables were correlated within each set. Under such circumstance, it is not
possible to use the variables in a regression framework
on account of multicollinearity. Secondly, when there are
a large number of impacted variables, they need to be
collapsed into a single dependent variable (Jha & Murthy,
2006).
There is a relevance of using PCA analysis in the
modeling. It allows for data reduction. The reduced data
set would contain the maximum information in all the
variables, which were being considered as dependent
variable. As a result of PCA, the reduced data set consists
of variables which were not correlated to each other, since
the principal components are orthogonal (perpendicular) to each other.
Finally, the PCA methodology enables us to construct a
composite index. The crux of this methodology is to represent complex interrelated phenomena such as a crisis
with the help of a single composite index, which could
act as a unique dependent variable. It may be argued that
there are many other factors that influence crises, but our
methodology ensures that the variables which were cho-
18
sen to construct crises index, effectively represent the impact of all the crises variables. Since the principal variables are highly correlated to the principal components,
they contain the same information. One measure of the
explanatory power of the index formed by this procedure
is given by the variation explained by the retained principal component.
Composite Index
Method for Construction of the Index
The main aim of this empirical work is to evolve a composite Index of Crisis (IOC). Hence, there is a need to
choose the essential variables by a data reduction procedure and arrive at relative weights for the purpose of consolidating these variables into a single index.
(4)
Xj = Retained variables
Wj = Component scores (weights)
j= 1, 2, 3.
For determining the weights, the Joliffe criterion was used.
According to this procedure, those principal variables
whose component scores were the highest with respect to
the retained components were retained. The process involved a seriatim selection of variables along with their
scores moving from the highest score in the first component to the next components and selecting the variable
with its highest score, and so on.
Scale and Code
It must be ensured that the index does not suffer on account of problems relating to scale and code. The problem of scale arises out of the difference in scale of the
variables that were components of the composite index.
In this case, the problem of the scale was handled by normalizing the variables5. As a result, variables were expressed in proportionate terms. The code of the variable
refers to the interpretation of the direction of change with
respect to the value or the measure of the index. For instance, a high number in the index should represent an
increase in the phenomena that the composite index stands
for and higher number should also be generated by the
5
All relevant variables have been expressed as a proportion of

GDP.
higher value of the component of the index, which implies a rise in the phenomena. For instance, if exchange
rate is expressed as a local currency unit per dollar, then
a sharp devaluation or depreciation of the currency is
expected during the crises. Hence, the magnitude of the
variable should rise. It is therefore necessary to have consistency between the magnitude of the code and the interpretation of direction of change of the phenomenon, on
the one hand, and consistency within the code in relation
to the individual variables that constitute the index, on
the other. Therefore, a composite index would be representative only if the components of the index are representative and both the scale and the code are consistent
with the value of the index that is generated. It should
yield a unique and consistent interpretation of the index.
Advantage of the Composite Index
To ascertain whether composite indices function better
than the individual variables, a regression equation was
estimated by including the principal variable directly in
the regression6. The results were not satisfactory, and to
the contrary, a composite index performed better. Apparently, the complexity of the phenomenon was better represented by a composite index that represented the
combined information content. At the same time it reduced the number of variables and permitted higher degrees of freedom.
Panel Data Analysis

A methodology which allowed a combination of a continuous and discrete crisis definition, was adopted. The
intention of this paper is to capture a mix of the impact of
continuous independent variables and fixed effects in
terms of crisis window (discrete effects), as well as country effects in the form of country dummies. This is an essential part of the research design and objective. Therefore,
the need for a random effects model was not justifiable. In
general, random effects models are meant for capturing
generalized least square (GLS) estimators which measure the generalized effects and not the fixed effects (country effects) as has been the purpose of this study.
A fixed effects panel model was used where the slope
coefficients were constant, but the intercept varied over
country as well as time. This study constructs a model
which includes n-1 county dummies but only one time
6
dummy which represents the crises period (CW). Although there are three periods (pre-crises, during crises,
or post-crises ), only one time dummy was included in
the final model instead of two because the focus of this
study was on crises period. The idea was to have more
degrees of freedom. The recovery period was not so much
of interest to the authors as the crises period. The general
form of the equation that was estimated is as follows:
IOCit = A +b1* (CW) t + b2d2 + b3d3 + b4d4 +
b5d5 + b6d6 + b7* X1it + b8* X2it+U1it
(5)
IOCt = Dependent variable = Log (Index of Crisis)

A = intercept
b1 = Coefficient of crisis window.
b2 = Intercept dummy for Thailand
b3 = Intercept dummy for Philippines
b4 = Intercept dummy for Korea Republic
b5 = Intercept dummy for Indonesia
b6 = Intercept dummy for Malaysia
(CW)t = Dummy for crisis window: 0 for all years & 1
for 1997, 1998
b7 = Elasticity coefficient for index of macro variables
IMV = Index of macro variables
b8 = Elasticity coefficient for index of financial variables
IFV = Index of financial variables
Since the methodology is based on a comparison of crises-hit countries with a non-crises hit country (that is, the
control), this objective can be met only through panel regression. Secondly, panel regression leads to more efficient estimators and the result of the panel regression
supports this objective. Thirdly, the fixed effect model allows measurement of the precise impact of crises on a
differential basis among the crises-ridden countries, and
between the crises-ridden country and control.
Apart from the above-mentioned justification for choosing the fixed effects model in line with the mixed approach to crises definition, an important basis of choosing
the fixed effects model is that different dummies were
taken with India as a base country. Therefore, the very
basis of this study lies in making a comparison between
India which was relatively unaffected by the crises and
A5 countries which were severely affected. The research
design essentially lends itself to a fixed effects model with
a view to capture discrete country effect on a comparative
basis.
This is known as Principal Variable Regression
19
Fixed effects models are not without their drawbacks. They

may frequently have too many cross-sectional units of
observations requiring too many dummy variables for
their specification. Too many dummy variables may sap
the model of sufficient number of degrees of freedom for
adequately powerful statistical tests. Moreover, a model
with many such variables may be plagued with multicollinearity, which increases the standard errors and
thereby drains the model of statistical power to test parameters. If these models contain variables that do not
vary within the groups, parameter estimation may be precluded. Although the model residuals are assumed to be
normally distributed and homogeneous, there could easily be country-specific (group wise) heteroscedasticity or
autocorrelation over time that would further plague estimation.
b1 = Co-efficient first lag of dependent variable

b2 = Co-efficient second lag of dependent variable
u1t = Error term of first equation
To avoid this kind of problem, only country-specific dummies and one time dummy were used in the final
modeling, as mentioned earlier. Time effect was considered as fixed. To deal with the problem of multicollinearity,
the index of the impacted/ dependent variables was constructed and it was ensured that there was no correlation
among those indexes. The problem of auto-correlation was
taken care of by measuring the Durbin-Watson statistic
which happens to be in the normal range.
The procedure consists of constructing sets of pairs of

two variables amongst which the causality is being tested
for. Alternatively, each variable acts as the dependent and
independent variable. The lags of both the variables are
included on the swap as either dependent lagged variables or independent lagged variables. If the lags of the
independent variable significantly impact the dependent variable, then the independent variable is known to
have caused the dependent variable. The procedure is
repeated by swapping the dependent and independent
variable for testing for reverse causality. If the causality is
found in both directions, then it is known as a bi-way
causal relationship ; else it is known as a one-way causal
relationship.
RESULT AND ANALYSIS

This section interprets the results of various empirical
procedures which were applied to the data set in order to
arrive at some relevant insights and conclusions.
Causality Test
The Granger causality test consists of testing pairs of equations expressed below:
Yt = a1 Xt-1 + a2 Xt2 + b1 Yt1 + b2 Yt2 + u1t
(6)
Xt = c1 Xt1 + c2 Xt2 + d1 Yt1 + d2 Yt2 + u2
(7)
In Equation 6,
Xt = Independent variable
Yt = Dependent variable
Xt-1 = First lag of independent variable
Xt-2 = Second lag of independent variable
Yt-1 = First lag of dependent variable
Yt-2 = Second lag of dependent variable
a1 = Co-efficient of first lag of independent variable
a2 = Co-efficient of second lag of independent variable
20
In Equation 7,
Xt = Dependent variable
Yt = Independent variable
Xt-1 = First lag of dependent variable
Xt-2 = Second lag of dependent variable
Yt-1 = First lag of independent variable
Yt-2 = Second lag of independent variable
c1 = Co-efficient of first lag of dependent variable
c2 = Co-efficient of second lag of dependent variable
d1 = Co-efficient of first lag of independent variable
d2 = Co-efficient of second lag of independent variable
u2t = Error term of second equation
Causality test was conducted on a set of 30 variables. (See

Tables 1 and 2 that describe the causal macro and financial variables). There were a total of 435 combinations.
Accounting for our own covariance, which was 15 (in
pair) in number, there were 420 combinations. Since the
procedure of testing involved testing in pair, it implies
that 210 causality tests were applied. On account of transitivity, the number of combination was halved7. The variables with two-way causality were dropped As in such
cases, one cannot identify which variable is to be taken as
dependent variable and which variable as independent
variable. The result of the causality exercise shows 19
causal variables. On the other hand, there were 16 impacted/dependent variables. (See Tables 3 and 4 that
describe the impacted macro and financial variables).
7
Tested at 10% level of significance. Result not reported
Table 1: Macro Causal Variables (Code and Name of the Variable)

Code
Abbreviation of the Variable
Name of the Variable
M1
BN.RES.INCL.CD
Changes in net reserves (Bop, current US$)
M2
BN.CAB.XOKA.GD.ZS
Current account balance (% of GDP)- CAB
M3
NE.EXP.GNFS.ZS
Exports of goods and services (% of GDP)-EOGD
M4
NY.GDP.MKTP.KD.ZG
GDP growth (annual %)- GDPG
M5
NY.GDP.PCAP.KD.ZG
GDP per capita growth (annual %)- GDPPC
M6
NE.GDI.TOTL.ZS
Gross capital formation (% of GDP)- GCF
M7
NE.IMP.GNFS.ZS
Imports of goods and services (% of GDP)- IOGS
M10
PA.NUS.FCRF
Official exchange rate (LCU per US$, period average)- OER % change over previous year
M11
GB.BAL.OVRL.GD.ZS
Overall budget balance, including grants (% of GDP)- OBB
M13
FR.INR.RINR
Real interest rate (%)- RI
Table 2: Financial Causal Variables (Code and Name of the Variable)

Code
F2
FS.AST.PRVT.GD.ZS
Domestic credit to private sector (% of GDP)- DCTPS
F3
GB.FIN.DOMS.GD.ZS
Domestic financing, total (% of GDP)- DFT
F4
BX.KLT.DINV.DT.GI.ZS
Foreign direct investment, net inflows (% of gross capital formation)- FDI
F6
IQ.ICR.RISK.XQ
ICRG composite risk rating (0=highest risk to 100=lowest)- CRR
F8
FR.INR.LEND
Lending interest rate (%)- LR
F10
CM.MKT.LCAP.GD.ZS
Market capitalization of listed companies (% of GDP)- MC
F12
DT.DOD.DSTC.ZS
Short-term debt (% of total external debt)- STD
F13
CM.MKT.TRAD.GD.ZS
Stocks traded, total value (% of GDP)- ST
F15
DT.TDS.DECT.GN.ZS
Total debt service (% of GNI)- TDS GNI
Table 3: Impacted Macro Variables (Code and Name of the Variable)

Code
M1C
BN.RES.INCL.CD
Changes in net reserves (BoP, current US$)- CINR
M2C
BN.CAB.XOKA.GD.ZS
M3C
NE.EXP.GNFS.ZS
Exports of goods and services (% of GDP)- EOGD
M5C
NY.GDP.PCAP.KD.ZG
M7C
NE.IMP.GNFS.ZS
M10C
PA.NUS.FCRF
M13C
FR.INR.RINR
M9
FP.CPI.TOTL.ZG
Inflation, consumer prices (annual %)
Table 4: Impacted Financial Variables (Code and Name of the Variable)

Code
F2C
FS.AST.PRVT.GD.ZS
F4C
F5C
BG.KAC.FNEI.GD.ZS
Gross private capital flows (% of GDP)- GCF
F6C
IQ.ICR.RISK.XQ
F8C
FR.INR.LEND
F12C
DT.DOD.DSTC.ZS
F13C
CM.MKT.TRAD.GD.ZS
F15C
DT.TDS.DECT.GN.ZS
21
The common variables which occurred both as a cause

and impact variable are shown in Table 58. In all, there
were 15 common variables. Thus out of 16 impacted variables, only one variable was left as pure impacted variable, that is, M9 (FP.CPI.TOTL.ZGInflation, consumer
prices (annual %)).
Correlation Analysis
Out of the 15 common variables, which ones would be
retained as impacted variables and form a part of the index of crisis was sorted out through correlation analysis.
First, correlation among the pure impacted variable M 9,
inflation, consumer prices (annual %) and the 15 common variables was calculated9. Out of the list of 15 common variables, only 14 were retained. Variable F15 - Total
debt service (% of GNI) was dropped because of non-availability of data in case of some countries. The list of 15
common variables are given in Table 5.
Common variables that were correlated with the single
impacted variable M9 inflation, consumer prices (annual
%) were retained as impacted/dependent variable. One
can argue that correlation could be high in case of impacted variable, since a composite index was constructed
out of it with the help of PCA that ensured that the correlation was removed. After applying correlation analysis,
the variables which were found to be highly correlated

with the pure impacted variables have been reported in
Table 6.
Formation of Index of Crises
PCA was applied on impacted variables. The final procedure for the formation of the index involved the following
steps:
1. Determination of number of principal components to
be retained. For this, the Kaiser criteria was used and
three principal components where eigen value was
greater than one, were retained. Table 7(a) shows the
total variance explained by the extracted principal
component. It is evident that over 72 percent of the
information is captured by the retained component.
2. Rotation of components: With the help of Varimax rotation with Kaiser normalization, the components were
rotated. This was done with a view to obtain the clear
interpretation of the components. This resulted in a
set of component scores for each of the nine variables
with respect to the three retained components. Table
7(b) reports the component scores coefficient matrix.
3. Selection of principal variables: The Joliffe procedure
(explained earlier) was used to select the principal
variables. Three variables were selected in the de-
Table 5: List of Common Variables

Code
M1C
BN.RES.INCL.CD
Changes in net reserves (BoP, current US$)- CINR
M2C
BN.CAB.XOKA.GD.ZS
M3C
NE.EXP.GNFS.ZS
Exports of goods and services (% of GDP)- EOGD
M5C
NY.GDP.PCAP.KD.ZG
M7C
NE.IMP.GNFS.ZS
M10C
PA.NUS.FCRF
M13C
FR.INR.RINR
F2C
FS.AST.PRVT.GD.ZS
F4C
F5C
BG.KAC.FNEI.GD.ZS
Gross private capital flows (% of GDP)- GCF
F6C
IQ.ICR.RISK.XQ
F8C
FR.INR.LEND
F12C
DT.DOD.DSTC.ZS
F13C
CM.MKT.TRAD.GD.ZS
*F15C
DT.TDS.DECT.GN.ZS
* Variable which was dropped due to non-availability of data in case of some countries.
8
Marked as C in Table 5.
By using SPSS 15
22
Table 6: Variables Significantly Correlated with Variable M9

Code
M13
FR.INR.RINR
Real interest rate (%)
M1
BN.RES.INCL.CD
Changes in net reserves (Bop, current US$)
M3
NE.EXP.GNFS.ZS
Exports of goods and services (% of GDP)
M2
BN.CAB.XOKA.GD.ZS
Current account balance (% of GDP)
M7
NE.IMP.GNFS.ZS
Imports of goods and services (% of GDP)
M10
PA.NUS.FCRF
Official exchange rate (LCU per US$, period average) % change over previous year
F2
FS.AST.PRVT.GD.ZS
Domestic credit to private sector (% of GDP)
F8
FR.INR.LEND
Lending interest rate (%)
*M9
FP.CPI.TOTL.ZG
Inflation, consumer prices (annual %)
Table 7(a): Total Variance Explained

Extraction Sums of Squared Loadings
Rotation Sums of Squared Loadings
Component
Total
% of Variance
Cumulative %
Total
% of Variance
Cumulative %
3.143
34.921
34.921
3.013
33.482
33.482
2.352
26.137
61.058
2.300
25.553
59.035
1.052
11.687
72.745
1.234
13.709
72.745
Extraction Method: Principal Component Analysis
Table 7(b): Component Score Coefficient Matrix

Component
1
CINRM1
-0.055
-0.072
0.366
CABM2
0.236
-0.002
0.485
EOGDM3
0.315
0.022
-0.019
IOGSM7
0.297
0.021
-0.062
ICPM9
OERM10
RIM13
-0.098
0.361
0.048
0.009
0.402
-0.030
-0.053
-0.384
0.147
DCTPSF2
0.299
-0.051
0.104
LRF8
0.069
-0.044
0.694
Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization
Table 7(c): Correlations

EOGDM3
EOGDM3
OERM10
LRF8
Pearson Correlation
0.048
-0.268*
Sig. (2-tailed)
0.654
0.011
N
OERM10
90
90
90
Pearson Correlation
0.048
0.094
Sig. (2-tailed)
0.654
0.379
N
LRF8
Pearson Correlation
Sig. (2-tailed)
N
90
90
90
-0.268*
0.094
0.011
0.379
90
90
90
* Correlation is significant at the 0.05 level (2-tailed).

23
scending order beginning with the largest component.

Accordingly, the three principal variables selected
were; M 3 Exports of Goods and Services (% of GDP),
M 10 Official Exchange Rate (LCU per US$, period
average, % change over the previous year), and F 8
Lending Interest Rate (%).
4. Construction of index of dependent variable. By using
the weights from the component score coefficient matrix (given in step 3 of the PCA analysis), the index of
dependent variables was constructed. The composite
index of impacted variables (Y variable/the LHS variable) was calculated by multiplying the variables with
their respective weights.
(8)
The code of the variable refers to the value and direction
of each included variable in relation to the value and direction of the index. IOC measures the crises; therefore, a
higher value of the index should represent a higher degree of crises. Percentage change in the official exchange
rate over the previous year10 is expressed as LCU/$; therefore, a rise in its value would represent depreciation of
domestic currency. In effect, a higher value implies an
increase in the degree of crises. With depreciation, it may
be expected that value of exports of goods and services as
a percentage of GDP would increase which would also
add to the value of the crises index. Similarly, a higher
lending interest rate could also be expected during the
period of crises. Thus, all the three variables conform to
the desired code of IOC. That is, they rise in value term
when the crises increase; so also does the index of crises.
Thus, the code of the components of the index and the
crises index share the same interpretation.
During the crises, in general, there would be a tendency
of inflation to rise. Secondly, there could be a speculative
bubble; therefore, after the monetary authority resorts to
tight money policy, the interest rate is likely to increase.
There was a dual purpose for adopting this elaborate procedure.
Firstly, it was aimed at developing a composite index.
Secondly, it was important to ensure that a correlation
amongst retained variables was minimized which is a
10
Since we had to take % change over previous year for normalization of the variable, we had to forego one data point, that is, 1987.
The final period therefore is 1988 to 2002.
24
merit of PCA methodology. After having constructed an

index, it was necessary to verify the degree of correlation.
Table 7(c) shows that the correlations amongst the
retained principal variables that have been used for constructing an index were low and not statistically significant.
Index of Macro Variables
In the second stage of creating of composite index, the
index of causal macro variable was calculated.
We had a combined list of 10 causal variables, for both
financial and macro variables (Table 8).
Table 8: Combined List of Causal Variables
Code
Abbreviation of
the Variable
Name of the
Variable
M4
NY.GDP.MKTP.KD.ZG
GDP growth (annual %)
M6
NE.GDI.TOTL.ZS
Gross capital formation

(% of GDP)
M11
GB.BAL.OVRL.GD.ZS
Overall budget
balance, including
grants (% of GDP)
F3
GB.FIN.DOMS.GD.ZS
Domestic financing,
total (% of GDP)
F10
CM.MKT.LCAP.GD.ZS
Market capitalization of
listed companies (% of
GDP)
M5
NY.GDP.PCAP.KD.ZG
GDP per capita growth

(annual %)
F13
CM.MKT.TRAD.GD.ZS
Stocks traded, total

value (% of GDP)
F4
Foreign direct investment, net inflows (% of

gross capital formation)
F6
IQ.ICR.RISK.XQ
ICRG composite risk

rating (0=highest risk to
100=lowest)
F12
DT.DOD.DSTC.ZS
Short-term debt (% of
total external debt)
In the first place, out of the four macro variables, GDP per
capita growth was dropped on account of data redundancy. To make a composite index, PCA was applied on
the list of macro causal variables. The results of PCA are
shown in Tables 9(a) (c). The Kaiser criterion was applied for choosing components whose eigen value was
greater than one. Accordingly, three components were
retained and the total variance explained by these components was 100.
Table 9(b) shows the rotated component score coefficient

of the three macro independent variables that were being
sought to collapse into an index. The coefficients show
the factor loading of these three variables with respect to
the three retained principal components. Since all the
three principal variables were being retained, the component score matrix was used to identify the weights of each
of these variables. Joliffe procedure (explained earlier) was
used to select the principal variables.
(9)
The index of macro variables was calculated as the value
of the variables multiplied by its weights which were reported in the component score coefficient matrix. The selected variables are, M4 NY.GDP.MKTP.KD.ZGGDP
growth (annual %), M6 NE.GDI.TOTL.ZSGross capital formation (% of GDP), and variable M11 GB.BAL.
OVRL.GD.ZS Overall budget balance, including grants
(% of GDP).
The final step in the procedure was to examine the correlation matrix because the study was dealing with inter-
correlated variables that were sorted through a long process including causality tests. Presented in Table 9(c) is
the correlation matrix of the components of the index of
macro variables. M11 and M4 seem to have a high correlation, but as it is statistically not significant, it would not
cause mulicollinearity of any serious order.
The code of the variable refers to the interpretation of the
value of the direction of change with respect to the value
of the measure of the index of macro variables. As the
growth rate of GDP and the Gross Capital Formation decline, the crises can be expected to increase. When the
overall budget balance (OBB) increases under conditions
of deficit budget, OBB would fall further and would lead
to a crisis. Hence, a negative relationship among the variables similar to the macro variable index was expected.
Index of Financial Variables
In the third stage of creating of composite index, the index of causal financial variable was calculated. To make
a composite index, PCA was applied on the list of financial causal variables. The results of PCA are given in Tables 10 (a)-(c).

Extraction Sums of Squared Loadings
Rotation Sums of Squared Loadings
Component
Total
% of Variance
Cumulative %
Total
% of Variance
Cumulative %
2.156
71.869
71.869
1.186
39.531
39.531
0.700
23.339
95.207
1.048
34.919
74.450
0.144
4.793
100.00
0.766
25.550
100.00
Extraction Method: Principal Component Analysis

Component
1
GDPGM4
-0.684
GCFM6
OBBM11
-0.254
1.873
-0.036
1.108
-0.380
1.507
-0.024
-1.079
Extraction Method: Principal Component Analysis; Rotation Method: Varimax with Kaiser Normalization
Table 9(c): Correlation Matrix

EOGDM3
Correlation
OERM10
LRF8
GDPGM4
1.000
0.504
0.838
GCFM6
0.504
1.000
0.351
OBBM11
0.838
0.351
1.000
25

Component
Initial
Eigen Values
Extraction Sums of
Squared Loadings
Rotation Sums of
Squared Loadings
Total
% of
Variance
Cumulative
%
Total
% of
Variance
Cumulative
%
Total
% of
Variance
Cumulative
%
1.828
45.706
45.706
1.828
45.706
45.706
1.535
38.384
38.384
1.101
27.514
73.220
1.101
27.514
73.220
1.203
30.082
68.465
0.817
20.429
93.650
0.817
20.429
93.650
1.007
25.184
93.650
0.254
6.350
100.00
Extraction Method: Principal Component Analysis.

Component
1
F3
-0.047
0.122
1.025
F6_MOD
0.678
0.274
-0.014
F13
0.144
0.864
0.092
F10
-0.460
0.294
0.056
Extraction Method: Principal Component Analysis; Rotation Method: Varimax with Kaiser Normalization
Table 10(c): Correlation Matrix

Correlation
F3
F6_MOD
F13
F3
1.000
0.070
-0.224
-0.198
F6_MOD
0.070
1.000
0.011
-0.596
F13
-0.224
0.011
1.000
0.440
F10
-0.198
-0.596
0.440
1.000
The criterion for choosing three components was applied.

By the Kaiser criterion, the coverage was not adequate
(68.465). Accordingly, three components were retained
and the total variance explained by these components
was 93.650.
Table 10(b) shows the rotated component score coefficient
of the four financial independent variables that were being sought to collapse into an index. The coefficients show
the factor loading of these four variables with respect to
the three retained principal component. The Joliffe criterion was used to retain the three principal variables. The
component score matrix identifies the weights of each of
these variables.
(10)
26
F10
The index of financial variables was calculated as the

value of the variables multiplied by its weights which
were reported in the component score coefficient matrix.
The three retained variables were: F3 - GB.FIN.DOMS.GD,
ZSDomestic financing (% of GDP), F6 - IQ.ICR.RISK.
XQICRG composite risk rating (0=higher risk to
100=lowest risk) and F13 - CM.MKT.TRAD.GD.ZS
Stocks traded, total value (% of GDP). These were multiplied by the respective scores.
As in the case of macro variables, the final step in the
procedure was to examine the correlation matrix because
the study was dealing with inter-correlated variables that
were sorted through a long process including causality
test. Table 10(c) presents the correlation matrix of the component of the index of financial variables. There was some
moderate correlation between F10 and F6_MOD; however, none of the correlation was statistically significant.
Therefore, there was no problem of mulicollinearity.
The code of the variable refers to the interpretation of the

value of the direction of change with respect to the value
of the measure of the index of financial variable. The total
value of stocks traded is an indicator of the capital market activity. The total value would be influenced by the
turnover as well as the value of assets traded. When the
markets are on a high, both these aspects are likely to be
high. There may be a high degree of overvaluation of
shares. During a crisis, the turnover may also be high.
And, if the fundamentals of the economy are not strong,
such an excessive bubble could lead to crises. Therefore,
it may be expected that an increase in the value of stocks
traded would promote crises.
MODEL SPECIFICATION AND ESTIMATION
Domestic financing to private sector is to be interpreted

as the availability of excess credit. In the event that this
credit is feeding the asset bubble, it would result in greater
volatility and an inflation of asset prices that is unrelated
to the fundamental of the economy. This would therefore
be a major influence in precipitating crises.
A model was constructed which included n-1 countries

dummies and only one time dummy which represented
the crises period. Difference dummy was used for the intercept dummy in the final model. Although there were
three periods (pre-crises, crises, or postcrises), only one
time dummy was used in the final model instead of two
because the study was interested only in the crises period. More degree of freedom was desirable. Such a model
is represented by equation 11:
The third variable which was included in the index of

financial variable was (F6) ICRG - composite risk rating
(0=highest risk to 100=lowest risk). The code of this variable was running contrary to the direction of the index
because a lower value represents a higher risk. The final
form of this variable, which was a risk indicator, had to
bear a positive relationship with the index of crises. Therefore, the variable was modified by defining it as the complement of the original variable F6. This was achieved by
subtracting the value of each data point from 100. We
tested the modified F6 variable by applying PCA and
found that the result did not change either in terms of
variable selection form principal component or as component scores. The advantage therefore is that the index
of financial variable would now consist of all the three
variables that move in the same direction. Thus, a higher
value of the index clearly defines a greater level of the
factors that belong to the financial index. In this sense,
when the modified F6 is larger, the risk would be larger
and hence the potential of crises is larger. It may also be
recalled that higher risk implies greater volatility which
is the single most important factor responsible for crises.
On the basis of the above consideration, we expect that
the index of financial variables would have a positive
relationship with the index of crises.
Once it was clear which variable was to be taken as a

dependent variable and which other variables were to be
taken as independent variable, the choice was between
the appropriate model, functional form, and estimation
technique.
As far as model specification is concerned, crisis was considered as a function of 16 macro variables, 14 financial
variables, and a set of exogenous variables. Linear functional form was adopted for the model. The log linear
form could not be taken as some data points were negative and some were in percentage terms.
LIOCt = A +b1 * (CW) t + b2d2 + b3d3 + b4d4 +

b5d5 + b6d6 +b7 * LIDXFVit + b8* LIDXMVit +U1it (11)
IOCt = Dependent variable = Log (Index of Crisis)
A = intercept
b1= Coefficient of crisis window
b2 = Intercept dummy for Thailand
b3 = Intercept dummy for Philippines
b4 = Intercept dummy for Korea Republic
b5 = Intercept dummy for Indonesia
b6 = Intercept dummy for Malaysia
(CW)t = Dummy for crisis window: 0 for all years & 1
for 1997, 1998
b7 = Elasticity coefficient for index of macro variables
IMV = Index of macro variables
b8 = Elasticity coefficient for index of financial variables
IFV = Index of financial variables
U1it = Error term
i = 1 to 6 by country
t = 1988 to 2002
Determinants of Crises
The main purpose of the foregoing analyses, discussion
on methods, and model specification is to estimate a structured model which seeks to explain currency crises along
27
with individual differences among countries and other

fixed effects through a set of explanatory variables. These
explanatory variables are the determinants of crises in
the three policy periods provided that their parameters
are found to be statistically significant. For this purpose,
the following fixed effects panel regression was estimated.
The results are reported in Table 11.
The result of Equation 11, the final model is reported as
follows:
LIOCit = A + 0.36 (CW) t + 0.51 (d2) + 0.41
(d3) + 1.37 (d4) + 0.54 (d5) + 0.98 (d6) + -0.20 *
LIDXFVit + (0.26) * LIDXMVit + U1it (12)
(12)
In the estimated double log model, financial variables

index is significant at 10 percent which is an acceptable
threshold. This is presumably so due to higher volatility
of financial variables; therefore, standard error is high.
So far, as a determinant, the impact of financial variables
on the crisis variables is less definite in comparison to the
macro index. The value of R square is fairly high at 0.72.
However, in general, the index of financial variables has
a smaller elasticity of 0.21 approximately, but it is posi-
tive which indicates that according to our continuous

definition of crises, financial variables are responsible
for escalating the crisis index. The positive signs clearly
show that financial variables are responsible for enhancing the crises on a continuous basis.
The index of macroeconomic variables, on the other hand,
has slightly larger magnitude of 0.255. However, macroeconomic variables index bears a negative sign. This implies that macro variables in general reduce the magnitude
of crises. The macro variables therefore stabilize the
economy and hence reduce the intensity of crisis.
Yet, it needs to be pointed out that both the indices have
elasticities that are less than one. This has a significant
bearing on our measurement and analysis of crises. In
terms of magnitude, the intercept is large and significant.
This implies that there is a large domain of unknown
variables which have been omitted whose influences on
crises are substantial and significant. This means that
our understanding and measurement of crises has a large
element of uncertainty. It must be remembered that the
intercept contributes to the determination of the predicted
variable-index of crisis.
Table 11: Final Model

Regression Statistics
Multiple R
0.85231
R Square
0.726433
Adjusted R Square
0.699414
Standard Error
0.229639
Observations
90
ANOVA
df
28
SS
MS
Significance F
26.88602
8.00433E-20
Regression
11.34244
1.417805
Residual
81
4.271447
0.052734
Total
89
15.61389
Coefficients
Standard Error
t Stat
P-value
Intercept
2.872204
0.568448
5.052712
2.64E-06
CW
0.362984
0.073842
4.915711
4.55E-06
1.437612841
D2
0.516381
0.096763
5.336526
8.43E-07
1.675950899
D3
0.406131
0.084158
4.825837
6.46E-06
1.500999912
D4
1.374522
0.177197
7.757031
2.26E-11
3.953185275
D5
0.549734
0.085405
6.436757
8.05E-09
1.732792008
D6
0.980138
0.103953
9.42863
1.13E-14
2.664823967
LIDXFV
0.209432
0.124327
1.684531
0.095929
1.232977862
LIDXMV
-0.25518
0.07065
-3.61194
0.000526
0.774774645
17.67593008
Secondly, the country differentials such as culture, policy,

historical circumstances, etc. are all captured by the country dummy. Since all these are significant and positive, it
implies that country differential plays an important role
in determining crisis. It is difficult to further segregate
these effects that are country-specific. However, the methodology adopted in the paper takes into account the information content in the large set of variables. It is thus
most comprehensive in terms of its explanatory power
and its potential for measurement.
There were various models for the estimation of panel
data. This study used fixed effects approach in which the
slope coefficients were constant but the intercept varied
across countries, that is, fixed effects or least square
dummy variable (LSDV) regression model. The fixed effects arise due to the special features of different countries such as economic structure, political condition,
conditions of macro and financial fundamentals, countries linkages with the rest of the world in terms of the
trade, capital market, and money market linkages. The
term fixed effect denotes that although the intercept may
differ across countries (six in the present study), each individual countrys intercept does not vary over time; that
is, it is time invariant. It may be noted that fixed effect
model assumes that the slope coefficient of the independent variables such as index of macro and financial variables do not vary across countries or over time.
D2 =1, if the observation belongs to Thailand, 0, otherwise and so on for other countries, seriatum. Since the
study considered six countries, only five dummies were
used to avoid falling into the dummy variable trap (that
is, the situation of perfect co-linearity). There was no
dummy for India. In other words, the overall intercept (A)
represents the intercept of India and A+d2 represents the
differential intercept coefficient of Thailand and so on. It
tells by how much the intercept of the rest of the countries
differ from the intercept of India, since India is the base
country. Time effect was not included in the model. Hence,
the crises function does not shift over time. There is only
one dummy to represent the crisis window which takes
the value 0 for all years except 1997 and 1998 where it
takes the value 1.
One of the main findings of the estimation confirms our
conception of crises and vindicates our understanding
that the crises definition needs to be built into the causal
variables. Accordingly, we had introduced a dummy variVIKALPA VOLUME 38 NO 4 OCTOBER - DECEMBER 2013
able to capture a discrete change in the index of crises.

This variable was termed as CW. It basically implies a
discrete jump in the index of crises during the period of
crises. Therefore, while the continuous explanatory variable explains the buildup to the crises, it is the set of discrete intercept dummies and the CW variable that capture
the discrete aspects of crises. The country dummies enable international comparison while CW captures intertemporal comparison. It is therefore clear that the crises
phenomenon is a combination of continuous as well as
discrete change. The continuous effect arises on account
of a set of variables incorporated in the two indices. The
speciality of our approach is that it captures the genesis
of crises which is the volatility in the causal and dependent variables. This has been achieved by constructing the
variables through PCA methodology which maximizes
the variance. Therefore, the interpretation of the beta coefficients of the continuous variables is that it shows the
relationship between the volatility of causal variables and
the effects on the dependent variable in the form of volatility in the crises variables.
The crises window was highly significant; hence the definition of the crises window is correct as it captures the
crises as is clear from the p value. All the coefficients are
significant.
As far as the individual countrys shocks are concerned,
that may be due to omitted variables which may be important in respect of that country. For example, in case of
Korea, withdrawal of short-term debt was one of the major problems. Likewise in case of Thailand, depletion of
foreign reserves was the major problem.
Korea was most affected by the crises in this analysis as it
is clear from the intercept of D4 which is 21.629. It turns
out to be an economy that has undergone severe shock.
The p value in case of Korea was very low; it means that
the level of significance was high. It could be due to the
size of the economy among all the A5 countries, it was
Korea which was giant in size. In fact, it was the worlds
11th largest economy in terms of GDP at that time. Another possible explanation of this might be that all the
crises-hit countries, except Korea, had abounded their
earlier monetary system; if they were on the peg system
like Thailand, they would have announced a managed
float, like the Philippines which allows its peso to move
in a wider range against the dollar and Indonesia which
allows its rupiah to float. In November of 1997, it was
29
only Korea which was on the existing exchange rate system. Moreover, by that time all the rest of the countries
had approached the International Monetary Fund for technical as well as financial assistance or International Monetary Fund itself had offered a financial support package
to the crises-hit countries. For instance, in July 1997, IMF
had offered $1.1 billion as financial support to the
Phillipines. IMF had also approved $16.7 billion credit
for Thailand. Korea had not approached it until the first
week of December 1997. It tried to handle the problem on
its own, because the financial assistance from IMF was
coming with a cost of rising interest rate. The Korean
economy could not have sustained it since it was already
affected by the banking crises in January of 1997. Hanbo
Steel, a large Korean Chaebol, collapsed under a $6 billion debt load; it was the first Korean conglomerate in a
decade. In November, the sharp rise of dollar against the
Japaneses yen in global trade boosted the currency against
won in Korea. In South Korea, sentiments were negative;
media report in the Western press also stated that the
South Korean economic crisis was set to get worse. The
Korean government defended itself against the foreign
press report which suggested that the countrys financial
turmoil could surpass the recent market meltdowns in
Thailand, Indonesia, and the Philippines. The reports in
major international publication also reported that South
Koreas foreign reserves were dwindling and that the
country might need assistance from the IMF.
South Koreas woes began when its trade deficits ballooned in the year 1996 and the value of its currency
slipped after the South East Asian market shock waves
reached the country. That came at the time when the market was saddled with billions of dollar of bad loans in the
wake of a series of major bankruptcies. The international
rating agencies downgraded Koreas foreign debt. Interest rates soared and the stock market plummeted 28 percent in the year 1997 to reach a five-year low at the end of
October 1997. South Korea was the worlds 11th largest
economy larger than Thailand, Indonesia, and Malaysia
put together and the prospects of the financial crises had
put everyone from the Japanese exporters to investors in
Latin America on edge. Over 50 percent of the Korean
exports compete directly with Japanese products. The
wons move against the dollar often mirrors the yen trading movements versus the US currency. As local exporters tried to make their products more attractively priced
compared with the products of their Japanese rivals, any
30
positive effect of wons depreciation was effectively cancelled out by the yen decline vis--vis the US dollar. Korea in its own way was right in not abandoning its current
system; for doing this, they had to completely liberalize
the market. It was too early to do so in view of their economic status and in view of the fact that won was not
fully convertible. By mid-November 1997, the uncertainty
surrounding Korea had pressurized the regional currencies, the hardest hit being the Thai baht, the Philippine
peso, the Malaysian ringgit, and the Indonesian rupiah.
According to one view, the Korean currency turmoil was
unlikely to stop at its own borders. If the won depreciated, the yen was likely to depreciate as well.
An IMF bailout was a humiliating necessity for South
Korea, proud of its meteoric rise from a war-torn nation to
the worlds 11th largest economic powerhouse. IMF bailout required stringent economic reforms and policy controls. We can say that South Korea was the latest wounded
tiger to suffer heavy losses, its economic plight and delays in signing a loan agreement with the IMF being the
reasons for the same.
In the case of Indonesia, the intercept was higher (19.408)
than the base country (India 17.67). The p value was also
very low implying that the level of significance was high.
Indonesia abolished its system of managing the exchange
rate through the use of band and allowed it to float. IMF
gave Indonesia $23 billion financial support package. The
second most affected country by our analysis was Malaysia whose p value was quite low. It is also clear from the
intercept value of D6. The Malaysian Central Bank restricted loans to property and stocks to head off a crisis.
In case of Thailand, the intercept was higher than the
base country. The Thai baht was hit by the attack by speculators who considered Thailands slowing economy and
political instability as the right time to sell. The move to
save Finance One, Thailand largest finance company,
failed. The Thai Central Bank suspended operations of
16 cash-strapped finance companies and ordered them
to submit merger or consolidation plan. On July 2 1997,
the Bank of Thailand announced a managed float of the
baht and called IMF for technical assistance. The announcement effectively devalued the baht by about 15-20
percent. This was triggered by the East Asian Crises. Our
analysis clearly reveals that it was not most hit by the
crises. In case of the Philippines, the intercept was higher
than the base country indicating that although it was
affected by the crises, the impact was not severe. The cen-
tral bank raised the overnight rate by 1.34 percent to 13

percent and again to 24 percent thus dumping the dollar.
The Philippines Central Bank allowed the peso to move
in a wider range against the dollar. The IMF backed the
move and the board approved the Extended Fund Facility. Hence the effect was not distinct. It was low and uncertain.
In summary, the main purpose of the regression was to
identify a set of dependent variables that formed the index of crises and a set of independent variables which
formed the index of financial variables as well as the index of macro variables. Table 12 summarizes the cause
and effect relationship that explains the crises. The Table
does not indicate the countries dummies and the time
dummy.11
From the main model, the predicted value of the index of
crises was estimated. The first observation is that during
the crises window, all countries, including India, have
been clearly affected. There is evidence of a discrete jump
in the predicted index across countries. However, it can
be seen that the impact on India was the minimal. The
highest index was that of Indonesia which stood at
60.83157, while India, with 23, was the lowest. Most of
the countries during the crises were in the range of 60s.
The maximum rise was in the case of Indonesia that was
around 24 points. In Korea, on an average, the jump was

just about one point. Similarly, in the case of Thailand
and the Philippines, the appreciation was 11 and 7 points
respectively.
During the recovery phase, the patterns were more stable.
In the case of India, there was a decline down to 40 percent and the recovery was almost complete except for a
marginal overall rise in comparison to the pre-crises period. Both the Philippines and Thailand experienced a
halving of the index after crises and a mild decline towards pre-crises levels in the next three years. In the case
of Korea, while the dip in the index was down by one
third, there was a marginal rise and a stable trend which
resembled that of the late 1980s. In both Malaysia and
Indonesia, the decline was less than half and there was a
mild tendency towards a falling index which approximated their state at the end of 1980s and beginning of
1990s (Table 12). This pattern is depicted in Figure 1.
CONCLUDING REMARKS
The first objective of this study was to identify the causal
and impacted variables and the second was to sort them
into LHS and RHS variables for which correlation analysis was used. Both the objectives were duly met. The third
objective i.e. to form indices was met through PCA
Table 12: Predicted Index of Crisis

Year
Thailand
Philippines
Korea
Indonesia
Malaysia
India
1988
21.55736
25.96764
41.03978
27.37488
38.32451
16.36509
1989
20.6508
25.18948
40.64091
25.83559
36.86196
17.32047
1990
20.30497
26.81612
41.77969
25.84149
33.37887
17.91071
1991
20.58842
29.20521
42.27586
23.13533
32.34299
19.33262
1992
20.54555
25.74871
42.23782
23.5756
32.17903
16.69407
1993
20.20048
23.58768
42.29674
23.35578
30.22425
16.90031
1994
20.09617
21.84762
42.81112
23.01697
29.74991
15.10235
1995
19.43599
22.28141
42.6515
22.59393
29.65968
14.57693
1996
19.2316
21.15191
41.89849
23.00288
29.59737
15.15495
1997
37.09209
30.72588
60.01316
36.47265
46.58788
23.03583
1998
40.58957
37.11995
60.62232
60.83157
66.57738
23.11819
1999
29.18055
24.66319
41.00381
36.3185
36.59223
15.51987
2000
24.4165
23.74109
41.58963
30.83911
34.28066
16.73032
2001
25.44351
24.47137
41.43097
30.0384
39.19026
15.98588
2002
23.65691
24.39335
41.4666
30.89146
36.50731
15.9514
11
We also tested the model in which we first considered the interaction between time and crises window. We also tested the equation in which
we considered individuals variables and not the indexes. The results were not significant.
31
Figure 1: Predicted Indices of Crisis
Prediction of Crisis
70
60
50
Thailand
Philippines
IOC
40
Korea
Indonesia
30
Malaysia
20
India
10
data reduction and weighting procedure. This was the

crux of the methodology. The indices captured the volatility of the underlying variables, successfully summarizing the information of the macro and financial causal
variables, while the model captured the effect of these
causal variables on the crises phenomenon. The next objective was to specify a model which reflected various
aspects of the problem, namely crises definition (continuous and discrete), crises window, individual country effect, inter-temporal and international comparison with
respect to the benchmark country and better estimators.
This was achieved with the help of a panel data fixed
effects model in difference form. This confirms our notion
of the crises phenomenon as follows:
The crises develops continuously on account of volatility of variables.
The crises period can be captured and explained with
the help of certain discrete effects.
The crises can be understood with reference to a base
country.
A set of variables, both financial and macro, acts as a
composite index and determines crises in a continuous way.
Various other models which were tried out only reaffirmed
our conceptualization and methods of measurement of
crises because those models could not perform as well as
32
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
our chosen model. In the process, the problem of multicollinearity could be overcome, although the effect of a
large number of interrelated variables was incorporated.
It has been found that the index of crises consists of exports, exchange rate, and interest rate. The financial index contains risk rating, domestic financing, and stock
traded. The index of macro variables is based on GDP,
capital formation, and budget balance. Macro index negatively influences crisis and financial index influences crisis positively. The decomposition effects show that the
major influence is that of financial variables amongst
which stock traded and domestic financing are the most
important causes of crisis. Amongst the macro variables,
GDP growth is the major influence.
The main contribution of this paper lies in developing an
appropriate methodology that is capable of explaining
such a complex phenomenon as crisis in terms of two
indices of macro-economic and financial variables. In
this methodological paper, India is treated as the base
country. This shows that this methodology is capable of
making a comparative analysis between those countries
that are directly affected by crisis and, those like India,
which are indirectly affected. In the present context, this
means that a similar study can be done by taking India as
a base and comparing it with some of the developed econo-
mies like US, the UK, and the EU. Secondly, the PCA along
with Granger causality would help in identifying causal
and impacted variables. Also, the methodology for composite index formation can be applied for summarizing a
larger number of macro-economic and financial variables
which were affected during the global financial crises.
The concept of innovatively combining discrete and continuous crises definitions in this paper can also be applied successfully to the current international crises.
Hence, this paper can easily be extended to the present
financial crises.
Appendix: Summary of Literature Review

Study
Kaminsky, Lizondo, & Reinhart (KLR) (1998)
Dataset
Monthly data for 20 countries, 1970-1995 (Berg & Pattillo or BP, 1999)
Crisis Definition
Weighted average of ER changes and reserve changes; threshold is mean +3* standard deviation; separate
treatment for high inflation countries.
Exclusion Window
None
Indicators
15 indicators capturing external balance, monetary factors, output and equity movements
Approach
Signals set thresholds for indicators to minimize noise-to-signal ratio
Results
RER (deviation from deterministic trend), M2/reserves excess M1 growth, reserves, exports, domestic
credit, M2 multiplier (all % changes) good predictors
Asian Crisis Results
None
Notes
BP (1999) suggest using level of M2/reserves
Study
BP (1999)
Frankel & Rose (1996)
Dataset
KLR (1998); 5 European economies, + 8 emerging

markets; 1970-April 1995 (24months before
Thai crisis)
Annual data from 1971-1992 for 105 countries
Crisis Definition
Same as KLR (1998)
ER change > 25% and which are at least 10% higher

than the last ER change; (to allow for high inflation
countries)
Exclusion Window
None
Yes; 3 years
Indicators
KLR (1998) + 2 more indicators (M2) (level)

Reserves and CA/GDP) binary base and weighted
sum a la Kaminsky (1998)
3 macroeconomic, 4 external balance, 2 foreign and

7 composition of capital flows
Approach
KLR (1998) signalling and probit model
Probit
Results
Signalling approach produces similar results as

KLR (1998). The 2 new indicators noted above
are informative. Probit model shows that the
probability of crises increases when the following
variable exceeds the thresholds: real exchange
rate deviation, the CA, reserve growth, export
growth, level and growth rates of M2/reserves
Output growth, DC growth, foreign interest rate, FDI/

Total debt significant; reserves, RER somewhat
significant?
Both approaches perform significantly better

than pure guessing in terms of out-of-sample
prediction of the crisis in 1997
Not good, according to BP
Notes
Probit models seem to have better out-ofsample predictability than KLR
Many variables were unavailable for 1996, even as

of mid-1998
Study
Eichengreen, Rose, & Wyplosz (1996)
Caramazza, Ricci, & Salgado (2000)
Dataset
Quarterly data for 20 industrial countries from

1959-1993
41 emerging markets and 20 industrial economies

(covers Mexican, Asian, and Russian Crises) (19901998)
Crisis Definition
Weighted average of ER changes, reserve

changes and interest rate changes; threshold is
mean +1.5* standard deviation
An index of speculative market pressure = weighted

average of detrended monthly exchange rate
changes and reserve changes. The weights are
chosen so that the conditional variance of the two
components of the index is equal, and the trends are
country-specific. Several thresholds are used.
33
Alternative indices that include other financial market

variables are also used
Exclusion Window
Yes; one quarter
None
Indicators
Monetary, fiscal and external balance variables,

equity prices, labor market variables, and
contagion variables
Real variables (real GDP growth, average 3-year real

GDP growth, etc.); Monetary variables (12-month
inflation rate, real interest rate, etc.); Fiscal variables
(3-year log change of 12 month average of foreign
reserves, etc.); Financial variables (short-term share of
debt to BIS banks, etc.); Dummy variables (Mexican,
Asian, Russian crises dummy, etc.)
Approach
Probit
Panel Probit
Results
Contagion is significant (this was the focus of

the study)
Indicators of vulnerability to international financial

spillover (common creditor) and of financial fragility
(reserve adequacy) are highly significant after
controlling the role of domestic and external
fundamentals and trade spillovers. Exchange rate
regimes and capital control does not seem to matter
None
Same as above
Notes
The recent pattern of crises in emerging market

economies does not appear to be different across
crises episodes (Mexican, Asian, and Russian).
Financial linkages through a common creditor
appear to explain the common pattern
Study
Edison (2000)
Glick & Moreno (1999)
Dataset
20 KLR countries and 8 emerging economies

that have experienced any currency crises
during 1970-95, and then expanded up to 1998
monthly data, 24-month crisis window
East Asian and Latin American countries (January,

1972-October 1997)
Crisis Definition
Similar to KLR. Index = % change in USD or

DM/unit currency weight times the % change in
foreign reserves. Weight is the ratio of standard
deviation of USD or DM /unit currency and
foreign reserves. Crisis occurs if the index is
> 2.5 times the (standard deviation of the index)
+ mean of the index
Crisis = the percentage in the exchange rate exceeds

the mean plus two standard deviations. Different
definition for the economies with hyperinflation
(inflation rate greater than 150% in the previous 6
months a la KR (1996)
Exclusion Window
None
12 months
Indicators
In addition to KLR seven new indicators like US

output and G-7 output, US interest rates, oil
prices, the level of M2/foreign exchange reserves,
the change in short-term debt /foreign exchange
reserves and the level of short-term debt/foreign
exchange reserves.
Focus on money, credit (nominal and real M2, M2/

reserve money multiplier, M2/ foreign reserves, and
nominal and real domestic credit, all in growth rates),
trade and competitiveness (deviations in trend in the
real trade, Weighted ex-change rate, export revenue
growth, and the trade balance) variables
Approach
KLR (1998) signalling
Event-study graphs and multivariate probit
Results
It terms of noise-to-signal ratio, exchange rate,

the ratio of short-term debt to reserves, M2 /
reserve, loss in FX reserve, and sharp decline in
stock price do well. Based on the share of crises
called correctly, the 12 months percent change
in the ratio of short-term debt to reserves and
export growth do well.
Reductions in real domestic credit and in foreign

reserves and appreciation in the real exchanges rate
imply increases in the probability of a crisis.
The results for out-of-sample analysis are mixed,

but still can be used as a diagnostic tool.
Interpretation should be complemented by other
methods such as country surveillance
There is a distinct rise in the predicted crisis probability in East Asian economies
Notes
34
Study
Goldstein, Kaminsky, & Reinhart (2000)
Milesi-Ferretti & Razin (1998)
Dataset
87 currency crises and 29 banking crises

occurred in a sample of 25 emerging economies
and smaller industrial countries over 1970-1995
and then conduct out-of-sample analysis for
1996-1997 monthly and annual
48 African, 26 Asian economies, 26 from Latin

America and Caribbean and 5 European 1970-1996
Crisis Definition
Currency crises; KLR (1998) crisis index is the

weighted sum of the rate of the change of the
exchange rate (e) and of reserves (R). I=
(de/e)-s. d. e)/ (s. d. R)* (dR/R). Use different critical
value for the economies with hyperinflation
4 similar definitions based on Frankel and Rose

(1996)
Exclusion Window
None
3 years
Indicators
15 indicators in KR (1999) + 9 indicators

including CA as a share of GDP, short-term
capital inflows, FDI, and the overall budget
deficit, the growth rates in general government
consumption, central bank credit to the public
sector, net credit to the public sector and the CA
Macroeconomic variables (economic growth, real

consumption growth, etc.); Financial variables (ratio
of M2 to GDP, etc.); External variables (CA, real
effective exchange rate, etc.); Debt variables (ratio of
external debt to output, etc.); Foreign variables (real
interest rate in the US, the rate of growth of OECD
economies, etc.); Dummy variables (regional
dummies, exchange rate regime dummy, etc.)
Approach
Signalling
The extension of Frankel and Rose (1996) (longer

sample and alternative definition of currency crises)
multivariate probit
Results
Monthly: Appreciation of the real exchange rate

relative to trend, a banking crisis, a decline in
stock prices, a fall in exports, a high ratio of M2
to international reserves, and a recession. Annual:
A large CA deficit relative to both GDP and
investment
Similar to Frankel and Rose (1996) highlighting the

importance of degree of overvaluation, the level of
reserves, growth and interest rate in industrial
countries, and the terms of trade
There was a significant increase in the predicted

probability for Thailand, South Korea, the
Philippines, and Malaysia but Indonesia was
completely missed
NA
Notes
Examines the predictors of CA reversal and currency

crises. Then compare their effects over the output
afterwards emphasis is put on the comparison.
REFERENCES
Berg, A., & Pattillo, C. (1999). Predicting currency crises: The
indicators approach and an alternative. Journal of International Money and Finance, 18, 561-586.
Carramazza, F., Ricci, L., & Salgado, R. (2000). Trade and financial contagion in currency crises. IMF WP 00/55,
March. Accessed through www.imf.org
Edison, H. (2000). Do indicators of financial crises work? An
evaluation of an early warning system. Board of Governors of the FRS International Finance. Discussion Paper
675.
Eichengreen, B., Rose, A. K., & Wyplosz, C. (1996). Contagious currency crises. NBER Working Paper 5681.
Eliasson, A.-C., & Krevter, C. (2000). On currency crisis model:
A continuous crisis definition. Deutsche Bank Research.
Frankel, J. A., & Rose, A. K. (1996). Currency crashes in emerging markets: An empirical treatment. Journal of International Economics, 41(3-4), 351-366.
Glick R., & Moreno, R. (1999). Money and credit, competitiveness, and currency crises in Asia and Latin America. Center for Pacific Basin Money and Economic Studies FRB of San
Francisco WP 99-01.
Goldstein, M., Kaminsky, G., & Reinhart, C. (2000). Assessing
financial vulnerability: An early warning system for
emerging markets. Institute of International Economics,
Washington D.C.
Jha, R., & Murthy, K. (2006). Environmental degradation index: A survey of composite indices measuring country
performance: 2006 update. A UNDP/ODS Working Paper, By Romina Bandura With Carlos Martin del Campo,
Office of Development Studies, United Nations Development Programme, New York, 35-36.
Kaminsky, G., Lizondo, S., & Reinhart, C. M. (1998). Leading
indicators of currency crises. IMF Staff Papers. 45(1), 1-48.
Lewis-Beck, M. (1994). Factor analysis and related techniques.
Sage: New Delhi.
35
Malik, Anjala (2008). Measurement and analysis of international currency crises: Lessons for India. Unpublished
Ph.D. Thesis, University of Delhi.
Milesi-Ferritti, G.M., & Razin, A. (1998). Current account reversals and currency crises: Empirical regularities. IMF
WP 98/99.
Moreno, Ramon (1995). Macroeconomic behavior during periods of speculative pressure or realignment: Evidence
from Pacific Basin economies. Economic Review, Federal
Reserve Bank of San Francisco, 3-16.
K V Bhanu Murthy is a Professor at the Department of Commerce, at Delhi School of Economics, Delhi University. He is
a Ph.D. in Economics from the Department of Economics,
Delhi School of Economics. His recent contributions have
been in the areas of banking and finance, environmental economics, agricultural markets, international business, knowledge management, corporate social responsibility, and business ethics. Sixteen of his papers have been rated in the Top
Ten list of the Social Science Research Network Library (SSRN)
since its inception. His overall ranking at SSRN (amongst
2,41,000 economists, in the world) is at 99 percentile.
Anjala Kalsie is currently an Assistant Professor in the Faculty of Management Studies, University of Delhi. She has a
doctorate from the Department of Commerce, Delhi School
of Economics, Delhi University, and an M.Phil and M.Com.
from the same university. She is also a Fellow Member of the
Institute of Company Secretaries of India. She has published
10 empirical papers and has also presented five papers out of
which two were in international conferences. She has 14 years
of experience out of which four were in the industry. The
areas of her interest are financial economics, currency crises,
capital markets, and financial modeling.
e-mail: bhanumurthykv@yahoo.com
e- mail: kalsieanjala@gmail.com
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RESEARCH

includes research articles that

Measurement of International Currency

VIKALPA VOLUME 38 NO 4 OCTOBER - DECEMBER 2013

Malaysia, Philippines, Korea, Thailand, and Indonesia.

Weighted average of ER changes, weighted average of RER

which shall be discussed later.

MEASUREMENT OF INTERNATIONAL CURRENCY CRISES: A PANEL DATA APPROACH ...

ses. On the other hand, the explanatory variables are so

The result of correlation exercise is not reported.

The result of dummy variable exercise is not reported.

VIKALPA VOLUME 38 NO 4 OCTOBER - DECEMBER 2013

through literature review) were affected by the crises; and

MEASUREMENT OF INTERNATIONAL CURRENCY CRISES: A PANEL DATA APPROACH ...

Ho: X does not cause Y.

Yt = ai Xti + bi Yti + u1t

Xt= ci Xti + di Yti + u2t

hence, no information contained in the points in the event

It was also ensured that there was no two-way causality

squared weights is equal to 1, i.e.

optimal weight vector (a11, a12, a1p) and the associated

As mentioned earlier, the correlation exercise was done

Principal Component Analysis

ance of y1 is maximized, then the sum of the squared correlations, i.e.

is also maximized. PCA finds the

If the objective is a simple summary of the information

All relevant variables have been expressed as a proportion of

MEASUREMENT OF INTERNATIONAL CURRENCY CRISES: A PANEL DATA APPROACH ...

Panel Data Analysis

IOCt = Dependent variable = Log (Index of Crisis)

This is known as Principal Variable Regression

VIKALPA VOLUME 38 NO 4 OCTOBER - DECEMBER 2013

Fixed effects models are not without their drawbacks. They

b1 = Co-efficient first lag of dependent variable

The procedure consists of constructing sets of pairs of

RESULT AND ANALYSIS

Xt = c1 Xt1 + c2 Xt2 + d1 Yt1 + d2 Yt2 + u2

Causality test was conducted on a set of 30 variables. (See

Tested at 10% level of significance. Result not reported

MEASUREMENT OF INTERNATIONAL CURRENCY CRISES: A PANEL DATA APPROACH ...

Table 1: Macro Causal Variables (Code and Name of the Variable)

Abbreviation of the Variable

Name of the Variable

Changes in net reserves (Bop, current US$)

Current account balance (% of GDP)- CAB

Exports of goods and services (% of GDP)-EOGD

GDP growth (annual %)- GDPG

GDP per capita growth (annual %)- GDPPC

Gross capital formation (% of GDP)- GCF

Imports of goods and services (% of GDP)- IOGS

Overall budget balance, including grants (% of GDP)- OBB

Real interest rate (%)- RI

Table 2: Financial Causal Variables (Code and Name of the Variable)

Abbreviation of the Variable

Name of the Variable

Domestic credit to private sector (% of GDP)- DCTPS

Domestic financing, total (% of GDP)- DFT

Foreign direct investment, net inflows (% of gross capital formation)- FDI

ICRG composite risk rating (0=highest risk to 100=lowest)- CRR

Lending interest rate (%)- LR

Market capitalization of listed companies (% of GDP)- MC

Short-term debt (% of total external debt)- STD

Stocks traded, total value (% of GDP)- ST

Total debt service (% of GNI)- TDS GNI