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CURRENCY CRISES: THE CASE OF HUNGARY (2008-2009) USING TWO STAGE LEAST SQUARES

 

Dimitrios Dapontas

Technological Education Institution of the Ionian Islands

 

ABSTRACT

This paper deals with the currency crisis episode in Hungary that lasted from October 2008 to March 2009 and tries to empirically determine its key driving forces. The forward spread of the domestic currency, the forint, is selected as the dependent variable along with a set of independent macroeconomic and social variables such as the balance of payments, contagion, economic freedom, foreign exchange reserves, the price of gold, the lending rate spread, money, consumer prices and GNP, over a fourteen year period from 1995 to 2009. The estimation method used is the two stage least squares and fundamentals not strictly connected with the official forward rate are chosen as instruments. The main purpose of this exercise is to examine whether there is a relationship between the global credit crunch and the collapse of the Hungarian currency. The results show that the crisis primarily had its roots in the structural problems of the domestic economy, followed however by risk aversion and the current financial and banking crisis that hit the world economy in 2008.

 

JEL classification: F41, P33

Key words: currency crisis, emerging economies, structural reforms

 

Acknowledgments: I would like to thank the SEE Workshop organizing committee and especially Sophia Lazaretou and Altin Tanku for giving me the opportunity to present this piece of work. Special thanks are due to my discussant Claire Giordano for her excellent review and constructive comments that helped me to improve considerably the paper. I would like also to thank Heather Gibson for some editing suggestions. The views expressed in this paper are those of the author and do not necessarily reflect those of the Bank of Greece and the Technological Education Institution of the Ionian Islands. I alone am responsible for the remaining errors and omissions.

 

Correspondence

Dimitrios Dapontas

Technological Education Institution of the Ionian Islands

Department of Environmental Technology and Ecology

2 Kalvou sq. 29100 Zakynthos

Tel +30 26950 24941

Fax +30 26950 24949

e-mail: dapontas@uop.gr


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