PLSC - Muhammad
Ali
Arshad
 1
 
 MEMO

 The


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Unformatted text preview: Muhammad
Ali
Arshad
 1
 
 MEMO

 The
 “Institutions,
 Expectations
 and
 Currency
 Crises”
 suggest
 that
 political
 institutions
significantly
help
us
explain
and
forecast
the
currency
crises.
However,
I
 agree
to
the
Morris
and
Shin
model
but
disagree
with
the
models
and
variables
used
 in
 empirical
analysis.
 
The
empirical
analysis
deals
with
the
currency
crises
at
large,
 in
 regards
 to
 presidential
 and
 parliamentary
 democracies
 only
 whereas
 the
 involvement
and
interference
of
government
in
the
economic
policy
has
more
to
do
 with
the
currency
crises
than
just
the
political
system.
 The
empirical
analysis
that
deals
with
the
three
major
political
variables
such
as
the
 government
 turnover,
 political
 democracy
 and
 divided
 government
 are
 not
 complete
variables
to
explain
the
relation
between
certain
types
of
government
with
 the
forecasting
currency
crises.
To
explain
my
point
I
will
take
the
example
of
major
 currency
crises
of
the
world
that
is
Mexico,
Asian
and
Russian
Crises.
In
all
of
these
 examples
there
was
a
major
fault
in
ongoing
monetary
and
fiscal
policies,
which
lead
 to
political
turmoil
in
the
country
due
to
inflation
and
other
outcomes
as
a
result
of
 financial
crises.
A
worse
number
of
debt
to
GDP
ratio
occurs
in
US
but
the
factor
that
 plays
an
important
role
is
the
relative
Independent
Monetary
Policy.
 Furthermore,
 the
 political
 implications
 came
 after
 the
 currency
 crises
 in
 all
 the
 countries
including
Russia,
which
is
not
a
democratic
state
and
still
the
government
 was
 stable.
 And
 by
 the
 term
 stable
 I
 mean
 there
 were
 no
 major
 opposition
 or
 uprising
of
political
or
social
nature,
all
of
it
came
after
the
crises.

 To
 understand
 and
 improve
 the
 empirical
 analysis
 of
 the
 models,
 some
 new
 variables
 should
 be
 added
 to
 the
 data.
 Firstly,
 the
 Economic
 Independence
 Index
 (EII)
 which
 should
 determine
 on
 a
 scale
 that
 how
 much
 of
 a
 country’s
 economic
 policy
is
independent
of
its
political
system
and
interest
group
and
is
market
driven.
 Secondly,
 there
 should
 be
 a
 measure
 of
 Investor
 confidence
 based
 on
 the
 monthly
 analysis
of
the
current
and
new
investor
actions.

 Economic
 Independence
 Index
 (EII)
 is
 necessary
 in
 regards
 to
 the
 following
 example.
As
US
and
Mexico
will
both
be
considered
Democratic
countries
under
the
 model.
 In
 Mexico
 crises
 1994,
 the
 ‘government
 turnover’
 and
 ‘divided
 democracy’
 came
 after
 the
 crises
 there
 were
 no
 major
 effect
 or
 implications
 of
 these
 variables
 before
 crises.
 What
 does
 not
 include
 in
 the
 model
 analysis
 is
 the
 involvement
 of
 politicians
 in
 the
 monetary
 policy,
 which
 included
 the
 major
 destructive
 monetary
 steps
taken
by
then
president
Carlos
Salinas,
whereas
in
US
the
president
can
only
 advice
but
cannot
directly
 implement
a
monetary
policy,
 which
is
the
job
of
Federal
 Reserve.

 Analyzing
 and
 Involving
 the
 Investor
 Confidence
 on
 a
 monthly
 basis
 is
 important
 because
 historically
 the
 investors
 are
 the
 first
 indicator
 of
 currency
 crises
 and
 the
 most
important
of
all
the
factors
for
preventing
it.
If
the
government
institution
can
 analyze
and
scale
investor
confidence
it
will
be
an
early
indicator
for
forecasting
the
 currency
crises
beside
others.

 In
 conclusion,
 the
 political
 institutions
 help
 explain
 the
 currency
 crises
 but
 the
 important
 factors
 lies
 before
 it
 any
 changes
 occur
 in
 political
 system.
 The
 political
 Muhammad
Ali
Arshad
 3
 
 institutions
 are
 short‐term
 and
 less
 important
 factors
 whereas
 if
 included,
 the
 Economic
 Independence
 Index
 and
 Investor
 Confidence
 can
 be
 very
 accurate
 and
 effective
variables
for
analyzing
currency
crises.
 ...
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