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Leading indicators of currency crises

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Author Info
Kaminsky, Graciela
Lizondo, Saul
Reinhart, Carmen M.

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Abstract

The authors examine the empirical evidence on currency crises and propose a specific early-warning system. This system involves monitoring the evolution of several indicators that tend to exhibit unusual behavior in the periods preceding a crisis. An indicator exceeding a certain threshold value should be interpreted as a warning"signal"that a currency crisis may take place within the following 24 months. The threshold values are calculated to strike a balance between the risk of having many false signals and the risk of missing many crises. Within this approach, the variables with the best track record include exports, deviations of the real exchange rate from trend, the ratio of broad money to gross international reserves, output, and equity prices. The evidence does not support some of the other indicators that were considered, including imports, bank deposits, the difference between foreign and domestic real deposit interest rates, and the ratio of lending to deposit interest rates.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1852.

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Date of creation: 30 Nov 1997
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Handle: RePEc:wbk:wbrwps:1852

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Keywords: Payment Systems&Infrastructure Economic Theory&Research Fiscal&Monetary Policy Environmental Economics&Policies Labor Policies Economic Theory&Research Macroeconomic Management Economic Stabilization Environmental Economics&Policies Financial Economics

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References listed on IDEAS
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  1. Kamin, S.B., 1988. "Devaluation, External Balance, And Macroeconomic Performance: A Look At The Numbers," Princeton Studies in International Economics 62, International Economics Section, Departement of Economics Princeton University,.
  2. Edin, P.A. & Vredin, A., 1991. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Papers 1991g, Uppsala - Working Paper Series.
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  3. Gerlach, Stefan & Smets, Frank, 1994. "Contagious Speculative Attacks," CEPR Discussion Papers 1055, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Inci Ötker & Ceyla Pazarbasioglu, 1994. "Exchange Market Pressures and Speculative Capital Flows in Selected European Countries," IMF Working Papers 94/21, International Monetary Fund.
  5. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November. [Downloadable!] (restricted)
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  6. Milesi-Ferretti, G-M & Razin, A, 1996. "Current-Account Sustainability," Princeton Studies in International Economics 81, International Economics Section, Departement of Economics Princeton University,.
  7. Ozkan, F Gulcin & Sutherland, Alan, 1995. "Policy Measures to Avoid a Currency Crisis," Economic Journal, Royal Economic Society, vol. 105(429), pages 510-19, March. [Downloadable!] (restricted)
  8. Blackburn, Keith & Sola, Martin, 1993. " Speculative Currency Attacks and Balance of Payments Crises," Journal of Economic Surveys, Blackwell Publishing, vol. 7(2), pages 119-44, June.
  9. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February. [Downloadable!] (restricted)
  10. Goldfajn, Ilan & Valdes, Rodrigo O., 1998. "Are currency crises predictable?," European Economic Review, Elsevier, vol. 42(3-5), pages 873-885, May. [Downloadable!] (restricted)
  11. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Maurice Obstfeld, 1986. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Garber, P.M. & Svensson, L.E.O., 1994. "The Operation and Collapse of Fixed Exchange Rate Regimes," Papers 588, Stockholm - International Economic Studies.
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  14. Dellas, Harris & Stockman, Alan, 1993. "Self-Fulfilling Expectations, Speculative Attack, and Capital Controls," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 721-30, November. [Downloadable!] (restricted)
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  15. Michael W. Klein & Nancy P. Marion, 1994. "Explaining the Duration of Exchange-Rate Pegs," NBER Working Papers 4651, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-2), pages 219-294. [Downloadable!]
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