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Currency Crises in EU Candidate Countries: An Early Warning System Approach

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  • Vesna Bucevska

Abstract

The purpose of this paper is to develop an econometric model of early warning system (EWS) for predicting currency crises in EU candidate countries. Using actual quarterly panel data for three EU candidate countries (Croatia, Macedonia and Turkey) in the period January 2005 - June 2010, we estimate a binomial logit model, which accurately predicts potential episodes of outbreak of currency crisis. In addition, we find that real GDP growth rate, participation in an IMF loan program, current account and fiscal balance and short-term external indebtedness are the most significant common predictors of currency crises across EU candidate countries. These results imply implementing policy measures aimed at raising the growth potential of the domestic economies of EU candidate countries, monitoring their short-term external indebtedness, improving their external competitiveness, cutting public spending and increasing the confidence of residents and non-residents in their domestic banking sectors. Key words: Currency crises, Early warning system, EU candidate countries, Logit model, Prediction.JEL: C13, C23, C25, C51, C53, E44, F31, F32, G01.

Suggested Citation

  • Vesna Bucevska, 2015. "Currency Crises in EU Candidate Countries: An Early Warning System Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(4), pages 493-510.
    • Handle: RePEc:voj:journl:v:62:y:2015:i:4:p:493-510:id:59
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    More about this item

    Keywords

    Currency crises; Early warning system; EU candidate countries; Logit model; Prediction;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G01 - Financial Economics - - General - - - Financial Crises

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