Assessing Indicators of Currency Crisis in Ethiopia : Signals Approach
AbstractCurrency crises, generally defined as rapid depreciations of a local currency or loss of foreign exchange reserves, are common incidents in modern monetary systems. Due to their repeated occurrence and severity, they have earned wide coverage by both theoretical and empirical literature. However, unlike advanced and emerging economies, currency crises in low-income countries have not received due attention. This paper uses the signals approach developed by Kaminsky et al. (1998) and assesses currency crisis in Ethiopia over the time frame January 1970 to December 2008. Using the Exchange Market Pressure Index (EMPI), we identify three currency crisis episodes that coincide with the liberalisation following the fall of Ethiopian socialism, the Ethio-Eritrean border conflict, and the zenith of the global financial crisis. The timing shows the importance of both local and international dynamics. More macro-economic indicators picked up the first crisis in a 24 month signalling window, compared to the latter two. Three categories of indicators were used: current account, capital account and domestic financial sector. None of the capital account indicators were significant based on the noise-to-signal ratio rule. One possible explanation for this might be the weak integration of the Ethiopian economy with global capital markets.
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Bibliographic InfoPaper provided by Universiteit Antwerpen, Institute of Development Policy and Management (IOB) in its series IOB Working Papers with number 2013.07.
Length: 29 pages
Date of creation: Jul 2013
Date of revision:
Currency crisis; financial crisis; early warning systems; signals approach; Ethiopia;
Other versions of this item:
- Megersa, kelbesa & Cassimon, Danny, 2013. "Assessing Indicators of Currency Crisis in Ethiopia: Signals Approach," MPRA Paper 47151, University Library of Munich, Germany.
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- G2 - Financial Economics - - Financial Institutions and Services
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
This paper has been announced in the following NEP Reports:
- NEP-AFR-2013-09-06 (Africa)
- NEP-ALL-2013-09-06 (All new papers)
- NEP-MON-2013-09-06 (Monetary Economics)
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