Signaling currency crises in South Africa - South African Reserve Bank

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SARB Conference 2006Figure 1: EMP dataExchange rate2520151050-5-101993/011993/081994/031994/101995/051995/121996/071997/021997/091998/041998/111999/062000/012000/082001/032001/102002/052002/122003/072004/022004/092005/04Percent change2005/11Interest rateChange in percent points43210-1-21993/011993/071994/011994/071995/011995/071996/011996/071997/011997/071998/011998/071999/011999/072000/012000/072001/012001/072002/012002/072003/012003/072004/012004/072005/012005/072006/01Reserves6000400020000-2000-4000-60001993/011993/071994/011994/071995/011995/071996/011996/071997/01Change in US$ million1997/071998/011998/071999/011999/072000/012000/072001/012001/072002/012002/072003/012003/072004/012004/072005/012005/072006/01Source: SARB (2006), own calculationsUsing the concept of inverse standard deviations as weights for the components of the EMP,including all three components, yields the EMP time series as shown in Figure 2.200Knedlik
SARB Conference 2006Figure 2: EMP weighted according to inverse standard deviationEMP121086index420-2-4-61993/011993/091994/051995/011995/091996/051997/011997/091998/051999/011999/092000/052001/012001/092002/052003/012003/092004/052005/012005/09Source: Own calculations based on SARB (2006)Higher values of the EMP index indicate higher exchange market pressure. In order to identifycrisis periods a definition of the crises threshold is needed. Figure 3 shows two versions of crisisthresholds used in the literature (more can be found in the table in the appendix). The figureshows the values of the EMP index in each year and the different threshold intervals. All datapoints of which the threshold intervals lie completely above the zero line are called crisis months(indicated by a black dot). In all cases the thresholds consist of the mean of the times seriesplus a varying multiple of the standard deviation (σ ).Figure 3 shows that indicated crisis months decline with the increasing threshold. While incircumstances where the threshold is set at the mean of the EMP time series plus 1,645 timesthe standard deviation indicates seven crises months, namely April and March 1996, May toAugust 1998, and December 2001. The increase of the threshold to 3,0 times the standarddeviation leads to “losing” March 1996, August 1998, and December 2001 as crisis months.Using a 25 percent annual depreciation of the exchange rate as an additional condition forcurrency crises, the crisis months would diminish to July and August 1998 and December 2001;furthermore 1996 would not be a crisis year any more. If the strict rule of 25 percent annualdepreciation is combined with the “three sigma”-threshold condition, only one month is identifiedas a crisis month during the period of observation: July 1998. Table 1 shows the depreciation ofthe exchange rate in percent of the pre-years value for the above identified potential crisismonths.Knedlik 201
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