Leading indicators of country risk and currency crises: the Asian experience
AbstractMost emerging capital markets in recent years adopted a system that narrowly pegs their currencies’ exchange rates to the U.S. dollar. While such a system has a number of advantages, it makes a country vulnerable to shocks in mobile international capital markets and can lead to reactive strategies that can drive the country into a currency crisis and inflationary recession. ; This article aims to construct an early warning system for international currency crises using financial variables reflecting investors’ expectations and banking distress, which are highly sensitive to changes in the economic environment. The authors use a dynamic factor model that switches between two regimes—representing periods of relative calmness and periods prone to currency crises—to construct leading indicators of country risk and currency crises. ; The method is applied to evaluate the model’s in-sample and out-of-sample performance in anticipating currency crises in the last two decades in Thailand, Indonesia, and Korea. The model successfully produces early signals of these crises, particularly the most severe one, which occurred in 1997. ; The study’s success in signaling future currency crises in real time demonstrates that the model’s “country risk” indicators can be informative tools that allow central banks to take preemptive counterpolicy measures to avoid a crisis or mitigate its severity.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of Atlanta in its journal Economic Review.
Volume (Year): (2004)
Issue (Month): Q 1 ()
Pages: 25 - 37
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1.
- Diebold, Francis X & Rudebusch, Glenn D, 1996.
"Measuring Business Cycles: A Modern Perspective,"
The Review of Economics and Statistics,
MIT Press, vol. 78(1), pages 67-77, February.
- Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
- Chauvet, Marcelle, 1998. "An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 969-96, November.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Carolina Arteaga & Carlos Huertas Campos & Sergio Olarte Armenta, 2012.
"Índice de Desbalance Macroeconómico,"
BORRADORES DE ECONOMIA
010077, BANCO DE LA REPÚBLICA.
- Thangjam Rajeshwar Singh, 2011. "An ordered probit model of an early warning system for predicting financial crisis in India," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Initiatives to address data gaps revealed by the financial crisis", Basel, 25-26 August 2010, volume 34, pages 185-201 Bank for International Settlements.
- Cipollini, A. & Kapetanios, G., 2009.
"Forecasting financial crises and contagion in Asia using dynamic factor analysis,"
Journal of Empirical Finance,
Elsevier, vol. 16(2), pages 188-200, March.
- Andrea Cipollini & George Kapetanios, 2005. "Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis," Working Papers 538, Queen Mary, University of London, School of Economics and Finance.
- Andrea Cipollini & George Kapetanios, 2008. "Forecasting Financial Crises and Contagion in Asia using Dynamic Factor Analysis," Center for Economic Research (RECent) 014, University of Modena and Reggio E., Dept. of Economics.
- Andrea Cipollini & George Kapetanios, 2006. "Forecasting Financial Crises and Contagion in Asia using Dynamic Factor Analysis," Computing in Economics and Finance 2006 477, Society for Computational Economics.
- Yilmazkuday, Hakan & Akay, Koray, 2008. "An analysis of regime shifts in the Turkish economy," Economic Modelling, Elsevier, vol. 25(5), pages 885-898, September.
- Derrick Reagle & Dominick Salvatore, 2005. "Robustness of Forecasting Financial Crises in Emerging Market Economies with Data Revisionsâ€”A Note," Open Economies Review, Springer, vol. 16(2), pages 209-216, April.
- Christian Aßmann & Jens Boysen-Hogrefe, 2010. "Analysis of current account reversals via regime switching models," Economic Change and Restructuring, Springer, vol. 43(1), pages 21-43, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector).
If references are entirely missing, you can add them using this form.