Journal of International Economics 50 (2000) 327–350 www.elsevier.nl / locate / econbase Currency crises, sunspots and Markov-switching regimes * Olivier Jeanne , Paul Masson Research Department, International Monetary Fund, Washington, DC 20431, USA Received 20 February 1997; received in revised form 19 August 1998; accepted 28 January 1999 Abstract This paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotic dynamics for the devaluation expectations. We then propose an econo- metric technique, based on the Markov-switching regimes framework, by which these models can be brought to the data. We illustrate this empirical approach by studying the experience of the French franc between 1987 and 1993, and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots.  2000 Elsevier Science B.V. All rights reserved. Keywords: Currency crises; Self-fulfilling speculation; Sunspots; Markov-switching regimes; European Monetary System; French franc JEL classification: F3; F4 1. Introduction The crisis of the European Monetary System in 1992–1993, the collapse of the Mexican peso in 1994 and the Asian crises have heightened academic interest in the determinants of currency crises. Much debate has focused on whether the speculation was essentially determined by the fundamentals or whether it was, at *Corresponding author. Tel.: 11-202-623-4272; fax: 11-202-623-6334. E-mail address: ojeanne@imf.org (O. Jeanne) 0022-1996 / 00 / $ – see front matter  2000 Elsevier Science B.V. All rights reserved. PII: S0022-1996(99)00007-0