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Safety from Currency Crashes

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  • Kent Osband

    (International Monetary Fund)

  • Caroline Van Rijckeghem

    (International Monetary Fund)

Abstract

As part of a proposed two-stage early warning system, we estimate "safety zones" for fundamentals under which currency crashes are unlikely to occur. We depart from traditional regression-based early warning systems and instead estimate the set of fundamentals for which currency crises never occurred and label this environment "safe or near-safe." For a sample of emerging markets from 1985 through 1998, we are able to classify 47 percent of the observed tranquil environments as safe or near-safe on a 12-month horizon, based on criteria in which external debt and reserves feature heavily. Nonparametric tests indicate that environments we identified as safe or near-safe bear less than a 1 percent risk of a currency crash. The results also pass a number of out-of-sample tests. Copyright 2000, International Monetary Fund

Suggested Citation

  • Kent Osband & Caroline Van Rijckeghem, 2000. "Safety from Currency Crashes," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 1-4.
    • Handle: RePEc:pal:imfstp:v:47:y:2000:i:2:p:4
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    2. Joseph E. Gagnon, 2010. "Currency Crashes in Industrial Countries: What Determines Good and Bad Outcomes?," International Finance, Wiley Blackwell, vol. 13(2), pages 165-194, August.
    3. Gagnon, Joseph E., 2009. "Currency crashes and bond yields in industrial countries," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 161-181, February.
    4. Ali Ari & Raif Cergibozan, 2016. "A Comparison of Currency Crisis Dating Methods: Turkey 1990-2014," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 12(3), pages 19-37.
    5. Christofides, Charis & Eicher, Theo S. & Papageorgiou, Chris, 2016. "Did established Early Warning Signals predict the 2008 crises?," European Economic Review, Elsevier, vol. 81(C), pages 103-114.
    6. Caroline Rijckeghem & Beatrice Weder, 2009. "Political institutions and debt crises," Public Choice, Springer, vol. 138(3), pages 387-408, March.
    7. Dąbrowska-Gruszczyńska Katarzyna & Gruszczyński Marcin, 2021. "Nominal exchange rates EUR/GRD and EUR/ITL in the context of leaving the euro zone by Greece and Italy," Journal of Economics and Management, Sciendo, vol. 43(1), pages 293-316, May.
    8. Magazzino, Cosimo & Forte, Francesco, 2010. "Optimal size of government and economic growth in EU-27," MPRA Paper 26669, University Library of Munich, Germany.
    9. Michal Pazour, 2004. "Nové metodologické přístupy k tvorbě empirických modelů měnových krizí [New methodological approaches to the construction of currency crashes models]," Politická ekonomie, Prague University of Economics and Business, vol. 2004(3), pages 375-388.
    10. Weder di Mauro, Beatrice & Van Rijckeghem, Caroline, 2004. "The Politics Of Debt Crises," CEPR Discussion Papers 4683, C.E.P.R. Discussion Papers.
    11. Wolfgang Gerstenberger & Joachim Jungfer & Heinz Schmalholz, 2002. "Standortbedingungen in Polen, Tschechien und Ungarn und die Position Sachsens im Standortwettbewerb : Gutachten im Auftrag der Wirtschaftsförderung Sachsen GmbH," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 33, July.
    12. Mr. Andrew Berg & Rebecca N. Coke, 2004. "Autocorrelation-Corrected Standard Errors in Panel Probits: An Application to Currency Crisis Prediction," IMF Working Papers 2004/039, International Monetary Fund.
    13. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
    14. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.

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