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Monitoring and Forecasting Currency Crises

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  • ATSUSHI INOUE
  • BARBARA ROSSI

Abstract

Can we improve forecasts of currency crises by using a large number of predictors? Which predictors should we use? This paper evaluates the performance of traditional leading indicators and a new Diffusion Index (DI) method as Early Warning Systems to monitor the risk and forecast the likelihood of the recent currency crises in East Asia. We find that the DI performs quite well in real time. For most countries, the forecasted probabilities of a crisis increase substantially around the actual time of the crisis. The economic variables that help in forecasting future crises are output growth, interest rates and money growth. Copyright (c)2008 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2008.00125.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 40 (2008)
Issue (Month): 2-3 (03)
Pages: 523-534

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Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:2-3:p:523-534

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. 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.
  2. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
  3. Kuper, Gerard H. & Jacobs, Jan P.A.M. & Boonman, Tjeerd M., 2012. "The Global Financial Crisis and currency crises in Latin America," Research Report 12005-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  4. Gatopoulos, Georgios & Loubergé, Henri, 2013. "Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 54-75.

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