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An almost‐too‐late warning mechanism for currency crises1

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  • Jesús Crespo Cuaresma
  • Tomas Slacik

Abstract

We propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants. Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month. We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998.

Suggested Citation

  • Jesús Crespo Cuaresma & Tomas Slacik, 2010. "An almost‐too‐late warning mechanism for currency crises1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(1), pages 123-141, January.
    • Handle: RePEc:bla:etrans:v:18:y:2010:i:1:p:123-141
    DOI: 10.1111/j.1468-0351.2009.00369.x
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    1. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
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