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Early Warning Systems

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  • Abdul Abiad

Abstract

Previous early-warning systems (EWSs) for currency crises have relied on models that require a priori dating of crises. This paper proposes an alternative EWS, based on a Markov-switching model, which identifies and characterizes crisis periods endogenously; this also allows the model to utilize information contained in exchange rate dynamics. The model is estimated using data for the period 1972-99 for the Asian crisis countries, taking a country-by-country approach. The model outperforms standard EWSs, both in signaling crises and reducing false alarms. Two lessons emerge. First, accounting for the dynamics of exchange rates is important. Second, different indicators matter for different countries, suggesting that the assumption of parameter constancy underlying panel estimates of EWSs may contribute to poor performance.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/32.

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Length: 60
Date of creation: 01 Feb 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/32

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Keywords: Economic models; probability; probabilities; currency crises; asian crisis; contagion; survey; currency crisis; speculative attacks; early warning systems; crisis index; crisis episodes; standard deviation; crisis probability; pre-crisis; crisis probabilities; standard deviations; equation; time series; competitiveness; econometrics; crisis countries; financial crisis; statistics; early warning system; correlation; predictions; financial crises; probability model; forecasting; discriminant analysis; time series analysis; correlations; number of variables; normal distributions; financial liberalization; sampling; exchange rate crisis; cumulative distribution function; capital adequacy; corporate sector; hypothesis testing; maximum likelihood estimation; crisis resolution; banking crises; markov chain; estimation of parameters; cointegration; standard errors; samples; dummy variable; crisis country; statistic; linear regression; nonlinearity; free parameter; estimation period; gaussian distribution; estimation procedure; fitted model; financial contagion; credit boom; crisis volatilities; dummy variables; banking crisis; statistical methods; equations; functional form; crisis prevention; principal components analysis;

References

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