This dissertation consists of three chapters on international financial crises, nonlinear dynamics and macroeconomic issues in currency markets. The first chapter examines the mechanisms behind output drops across a sample of 23 international financial crises. While three generations of models have studied the causes of financial crises, less is known about the mechanisms by which crises lead to output drops. One unresolved question is whether the mechanisms behind output drops are similar across episodes. To address this question, we apply the Business Cycle Accounting (BCA) methodology by Chari et al. (2007) to a sample of crises. While the efficiency wedge is invariably the most important one, the relevance of the labor and investment wedges varies depending on the size of the output drop and the severity of banking problems--as measured by bank closures, nonperforming loans and credit flows. Typically, in cases with smaller output drops and milder banking crises, the labor wedge tends to be more important than the investment wedge. The opposite is true in cases, such as those in East Asia in 1997/98, with larger output drops and severe banking problems.;The second chapter explores the interaction between exchange rate volatility and fundamentals by examining the role of trade intensity in the reversion of exchange rates to long-run equilibrium values. While exchange rates remain mostly unpredictable, researchers have been able to link currency fluctuations to some fundamentals such as interest rates, Taylor rule fundamentals, and relative PPP. In an effort to add to this literature, in this paper we present evidence of a link between trade intensity and exchange rate dynamics. We first establish a negative effect of trade intensity on exchange rate volatility via panel regressions using distance as an instrument to correct for endogeneity. We also run a nonlinear model of mean reversion to compute half-lives of deviations of bilateral exchange rates from relative PPP, and find these half-lives to be significantly lower for high trade intensity currency pairs. This finding does not appear to be driven by Central Bank intervention. In an application, we show that our findings can be used to improve the performance of currency trading strategies, by allowing the thresholds beyond which a currency is considered overvalued to depend on trade intensity.;The last chapter provides an extensive analysis for both nonlinear and long memory characteristics as well as mean reverting behavior of real exchange rates. This paper estimates a fractionally integrated, nonlinear autoregressive ESTAR (FI-NLAR-ESTAR) model for strongly dependent processes developed by Baillie and Kapetanios (2008). While the linear fractionally integrated model appears to fail to detect mean reversion in real exchange rates, the nonlinear long memory model is found to be more supportive of significant empirical evidence for the presence of slow mean reversion in real exchange rates for all of the currencies considered in this study over the recent float. The results suggest that a model that is capable of representing both nonlinear and long memory characteristics may help identifying mean reversion in real exchange rates.
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