Predicting exchange rate crises

This paper predicts ex ante probabilities of currency crises and sizes of expected devaluations month by month for Mexico between 1980 and 1986. The forces contributing to speculative attacks on the Mexican peso include domestic fiscal and monetary shocks, external credit shocks and relative price shocks. Reducing domestic credit growth, increasing the uncertainty surrounding this growth, and reducing the size and perhaps increasing the frequency of currency realignments might have greatly reduced the amount of currency speculation against the peso between 1980 and 1986. Anticipated external credit supply shocks played a relatively minor role during Mexico's balance-of-payments crises.