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Predicting Currency Crises Using the Term Structure of Relative Interest Rates: Case Studies of the Czech Republic and Russia

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  • Jesús Crespo Cuaresma

    (Vienna University of Economics and Business, Institute for Fiscal and Monetary Policy)

  • Tomáš Slacík

    (Oesterreichische Nationalbank, Foreign Research Division)

Abstract

Among the plethora of early warning mechanisms for currency crises proposed in the literature, there is an approach which has received little attention so far. This rather simple early warning indicator relies on the term structure of relative interest rates, unlike the vast majority of such systems that are based on macroeconomic fundamentals to predict a crisis in a long- or medium-term horizon. It measures changes in market sentiment regarding the relative probability of a currency crisis to estimate the timing of a crisis within a very short time window. This indicator thus complements long-horizon models that have been widely used so far. We apply this method to currency crises in the Czech Republic in 1997 and in Russia in 1998 and fi nd evidence that the indicator would have performed well as a real-time predictor in both episodes of currency distress.

Suggested Citation

  • Jesús Crespo Cuaresma & Tomáš Slacík, 2007. "Predicting Currency Crises Using the Term Structure of Relative Interest Rates: Case Studies of the Czech Republic and Russia," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 135-149.
    • Handle: RePEc:onb:oenbfi:y:2007:i:1:b:5
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    References listed on IDEAS

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    Cited by:

    1. Cruz-Rodríguez Alexis, 2013. "The Relationship between Fiscal Sustainability and Currency Crises in Some Selected Countries," Review of Economic Perspectives, Sciendo, vol. 13(4), pages 176-194, December.
    2. Cruz-Rodriguez, Alexis, 2014. "¿Puede un índice de sostenibilidad fiscal predecir la ocurrencia de crisis cambiarias? Evidencias para algunos países seleccionados [Can a fiscal sustainability indicator predict the occurrence of ," MPRA Paper 54103, University Library of Munich, Germany.
    3. Crespo Cuaresma, Jesús & Slacik, Tomas, 2009. "On the determinants of currency crises: The role of model uncertainty," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 621-632, December.
    4. Cruz-Rodríguez, Alexis, 2015. "Sostenibilidad fiscal y crisis cambiarias: Un análisis empírico [Fiscal sustainability and currency crises: An empirical analysis]," MPRA Paper 67741, University Library of Munich, Germany.
    5. Alexis Cruz-Rodríguez, 2014. "Is there a relationship between fiscal sustainability and currency crises? International evidence based on causality tests," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 7(1), pages 69-87, April.

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