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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. 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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505735

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