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Are the Central and Eastern European Transition Countries still vullnerable to an Financial Crisis? Results from the Signals Approach

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  • Axel Brüggemann
  • Thomas Linne
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    Abstract

    The aim of the paper is to analyse the vulnerability of the Central and Eastern European accession countries to the EU as well as that of Turkey and Russia to a financial crisis. Our methodology is an extension of the signals approach. We develop a composite indicator to measure the evolution of the risk potential in each country. Our findings show that crises in Central and Eastern Europe are caused by much the usual suspects as in others emerging markets. In particular an overvalued exchange rate, weak exports and dwindling currency reserves have good predictive power for assessing crisis vulnerabilities.

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    File URL: http://www.iwh-halle.de/d/publik/disc/157.pdf
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    Bibliographic Info

    Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 157.

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    Date of creation: Mar 2002
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    Handle: RePEc:iwh:dispap:157

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    Keywords: financial crises; vulnerability indicator; central and eastern Europe;

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    1. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
    2. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
    3. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 534, Board of Governors of the Federal Reserve System (U.S.).
    4. McKinnon, Ronald I & Pill, Huw, 1999. "Exchange-Rate Regimes for Emerging Markets: Moral Hazard and International Overborrowing," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 19-38, Autumn.
    5. Pesaran, M.H. & Timmermann, A., 1990. "A Simple, Non-Parametric Test Of Predictive Performance," Cambridge Working Papers in Economics 9021, Faculty of Economics, University of Cambridge.
    6. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
    7. Martin Feldstein, 1999. "Self-Protection for Emerging Market Economies," NBER Working Papers 6907, National Bureau of Economic Research, Inc.
    8. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? a Test," IMF Working Papers 98/154, International Monetary Fund.
    9. Diebold, Francis X & Rudebusch, Glenn D, 1989. "Scoring the Leading Indicators," The Journal of Business, University of Chicago Press, vol. 62(3), pages 369-91, July.
    10. Enrica Detragiache & Asli Demirgüç-Kunt, 1999. "Monitoring Banking Sector Fragility," IMF Working Papers 99/147, International Monetary Fund.
    11. Hali J. Edison, 2003. "Do indicators of financial crises work? An evaluation of an early warning system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 11-53.
    12. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
    13. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
    14. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
    15. International Monetary Fund, 1998. "Leading Indicators of Banking Crises," IMF Working Papers 98/91, International Monetary Fund.
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