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What is the most prominent reserve indicator that forewarns currency crises?

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  • Aydın, Suat
  • Tunç, Cengiz

Abstract

In this study, the predictive powers of three indicators of international reserve adequacy, namely short-term debt-to-total reserves ratio, broad money-to-total reserves ratio, and reserves in months of imports on currency crisis are analysed. We show that while each indicator has the potential in predicting the probability of a crisis, the ratio of broad money-to-total reserves is a better and more robust indicator. While it is not possible to regulate the other two indicators, central banks have significant power in determining the ratio of broad money-to-total reserves and hence do have the capability of monitoring and possibly preventing or taming currency crises using this power.

Suggested Citation

  • Aydın, Suat & Tunç, Cengiz, 2023. "What is the most prominent reserve indicator that forewarns currency crises?," Economics Letters, Elsevier, vol. 231(C).
    • Handle: RePEc:eee:ecolet:v:231:y:2023:i:c:s0165176523003075
    DOI: 10.1016/j.econlet.2023.111282
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    References listed on IDEAS

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    More about this item

    Keywords

    Adequate level of reserves; Currency crisis; Financial crisis;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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