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An "Almost-Too-Late" Warning Mechanism For Currency Crises

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  • Jesus Crespo Cuaresma

    ()

  • Tomas Slacik

    ()

Abstract

We propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants. Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month. We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998.

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File URL: http://eeecon.uibk.ac.at/wopec2/repec/inn/wpaper/2007-10.pdf
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Bibliographic Info

Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2007-10.

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Length: 26
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:inn:wpaper:2007-10

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Keywords: Currency crisis; term structure of interest rates; transition economies.;

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  1. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
  2. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
  3. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  4. Ricardo Hausmann and Federico Sturzenegger, 2006. "Global imbalances or bad accounting? The missing dark matter in the wealth of nations," Business School Working Papers globalimbal, Universidad Torcuato Di Tella.
  5. Nouriel Roubini & Brad Setser, 2005. "Will the Bretton Woods 2 regime unravel soon? the risk of a hard landing in 2005-2006," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  6. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 5.
  7. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  8. Begg, David, 1998. "Pegging Out: Lessons from the Czech Exchange Rate Crisis," CEPR Discussion Papers 1956, C.E.P.R. Discussion Papers.
  9. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  10. Homi Kharas & Brian Pinto & Sergei Ulatov, 2001. "An Analysis of Russia's 1998 Meltdown: Fundamentals and Market Signals," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 1-68.
  11. Abbigail J. Chiodo & Michael T. Owyang, 2002. "A case study of a currency crisis: the Russian default of 1998," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 7-18.
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Cited by:
  1. Jesús Crespo Cuaresma & Tomás Slacík, 2007. "Predicting Currency Crises Using the Term Structure of Relative Interest Rates: Case Studies of the Czech Republic," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 135-149.
  2. Alicia Garcia-Herrero & Jacob Gyntelberg & Andrea Tesei, 2009. "The Asian crisis. What did local stock markets expect?," Working Papers 0902, BBVA Bank, Economic Research Department.

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