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Robust lessons about practical early warning systems

  • Beckmann, Daniela
  • Menkhoff, Lukas
  • Sawischlewski, Katja

Early warning systems (EWSs) are subject to restrictions that apply to exchange rates in general: fundamentals matter but their influence is small and unstable. Despite this limitation four major lessons emerge: First, EWSs have robust forecasting power and thus help policy-makers to prevent crises. Second, policy-makers must decide about some EWSs elements, such as the sensitivity of the forecasts. Third, EWSs performance is increased by taking a logit model, shorter samples and a regional approach. Fourth, the finding of contagion may motivate policy to shield its economy against inefficient international financial markets.

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Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 28 (2006)
Issue (Month): 2 (February)
Pages: 163-193

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Handle: RePEc:eee:jpolmo:v:28:y:2006:i:2:p:163-193
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