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Robust Lessons about Practical Early Warning Systems

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Author Info
Beckmann, Daniela
Menkhoff, Lukas
Sawischlewski, Katja

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Abstract

Early warning systems (EWSs) are subject to restrictions that apply to exchange rates in general: fundamentals matter but their influence is small and unstable. Keeping this in mind, five lessons emerge : First, EWSs have robust forecasting power and thus help policy-makers to prevent crises. Second, among competing crisis definitions there is one which is most practical. Third, take a logit model to condense information from various fundamental variables. Fourth, add a regional contagion dummy to the standard set of variables. Fifth, one may be tempted to address instability over time and countries by taking shorter samples and regional EWSs.

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Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Kiel 2005 with number 3.

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Date of creation: 2005
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Handle: RePEc:zbw:gdec05:3476

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Keywords: early warning system currency crises emerging markets

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation

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