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Robust Lessons about Practical Early Warning Systems

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  • Beckmann, Daniela
  • Menkhoff, Lukas
  • Sawischlewski, Katja

Abstract

Early warning systems (EWSs) are subject to restrictions that apply to exchange rates in general: fundamentals matter but their influence is small and unstable. Despite this limitation four major lessons emerge: First, EWSs have robust forecasting power and thus help policy-makers to prevent crises. Second, policy-makers must decide about some EWSs elements, such as the sensitivity of the forecasts. Third, EWSs performance is increased by taking a logit model, shorter samples and a regional approach. Fourth, the finding of contagion may motivate policy to shield its economy against inefficient international financial markets.

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Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-322.

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Length: 36 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:han:dpaper:dp-322

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Keywords: early warning system; currency crises; emerging markets;

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Cited by:
  1. Licchetta, Mirko, 2009. "Common determinants of currency crises: role of external balance sheet variables," Bank of England working papers 366, Bank of England.
  2. Fabio Comelli, 2013. "Comparing Parametric and Non-parametric Early Warning Systems for Currency Crises in Emerging Market Economies," IMF Working Papers 13/134, International Monetary Fund.
  3. Jo-Hui Chen & Chih-Sean Chen, 2012. "The study of contagious paces of financial crises," Quality & Quantity: International Journal of Methodology, Springer, vol. 46(6), pages 1825-1846, October.
  4. Fabio Comelli, 2014. "Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies," IMF Working Papers 14/65, International Monetary Fund.
  5. Cumperayot, Phornchanok & Kouwenberg, Roy, 2013. "Early warning systems for currency crises: A multivariate extreme value approach," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 151-171.
  6. Esaka, Taro, 2013. "Evaluating the effect of de facto pegs on currency crises," Journal of Policy Modeling, Elsevier, vol. 35(6), pages 943-963.
  7. Su, Dongwei & He, Xingxing, 2010. "A Hybrid Intelligent Early Warning System for Predicting Economic Crises: The Case of China," MPRA Paper 19962, University Library of Munich, Germany.

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