Abstract
In this paper, we examine whether pre-crisis leading indicators help explain pressures on the exchange rate (and its volatility) during the global financial crisis. We use a unique data set that covers 149 countries and 58 indicators, and estimation techniques that are robust to model uncertainty.
Our results are threefold: First and foremost, we find that price stability plays a pivotal role as a determinant of exchange rate pressures. More specifically, the currencies of countries that experienced higher inflation prior to the crisis tend to be more affected in times of stress.
Second, we investigate potential effects that vary with the level of pre-crisis inflation. In this vein, our results reveal that an increase in domestic savings reduces the severity of pressures in countries that experienced a low-inflation environment prior to the crisis.
Finally, we find evidence of the mitigating effects of international reserves on the volatility of exchange rate pressures