Predicting Financial Crisis in Developing Economies: Astronomy or Astrology?
In the aftermath of the European currency crisis of 1992-3, the Mexican financial crisis of 1994-5 and the Asian financial crisis of 1997-8, neoclassical economists in the academy and policy community have been engaged in a project to develop predictors or indicators of currency, banking and generalized financial crises in developing economies. This paper critically examines the efforts of the economics profession in this regard on both empirical and theoretical grounds. The paper argues that these predictors perform poorly on empirical grounds--indeed, the predictors developed after each of these crises failed to predict the next major crisis. These predictors are also rejected on theoretical grounds. From a post-Keynesian perspective, there is no reason to expect that the mere provision of information will prevent crises by changing agents' behaviors. The paper will also propose several indicators that are consonant with post-Keynesian economic theory, although it will be argued that these indicators do not represent a sufficient means to prevent financial crisis. Ironically, as agents develop confidence in the predictive capacity of crisis indicators, they may engage in actions that increase the economy's vulnerability to crisis. Far more important to the project of preventing financial crisis in developing economies is the implementation of constraints on those investor behaviors that render liberalized, internationally integrated financial systems inherently prone to instability and crisis. Hence, intellectual capital would be more productively expended on devising appropriate changes in the overall regime in which investors operate (such as measures that compel changes in financing strategies) rather than in searching for new predictors of crisis.
Volume (Year): 29 (2003)
Issue (Month): 2 (Spring)
|Contact details of provider:|| Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA|
Phone: (201) 684-7346
Web page: https://www.quinnipiac.edu/eea/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Summers, L-H & Cline, W-R & Eichengreen, B & Portes, R & Fraga, A & Goldstein, M, 1996.
"From Halifax to Lyons : What Has Been Done About Crisis Management?,"
Princeton Essays in International Economics
200, International Economics Section, Departement of Economics Princeton University,.
- Summers, L-H & Cline, W-R & Eichengreen, B & Portes, R & Fraga, A & Goldstein, M, 1996. "From Halifax to Lyons : What Has Been Done About Crisis Management?," Princeton Studies in International Economics 200, International Economics Section, Departement of Economics Princeton University,.
- Philip Arestis, 2002. "Financial crisis in Southeast Asia: dispelling illusion the Minskyan way," Cambridge Journal of Economics, Oxford University Press, vol. 26(2), pages 237-260, March.
- Machiko Nissanke & Howard Stein, 2003. "Financial Globalization and Economic Development: Toward an Institutional Foundation," Eastern Economic Journal, Eastern Economic Association, vol. 29(2), pages 287-308, Spring.
- Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998.
"Leading Indicators of Currency Crises,"
6981, University Library of Munich, Germany.
- Rose, A.K. & Svensson, L.E.O., 1993.
"European Exchange Rate Credibility Before the Fall,"
542, Stockholm - International Economic Studies.
- Rose, Andrew K. & Svensson, Lars E. O., 1994. "European exchange rate credibility before the fall," European Economic Review, Elsevier, vol. 38(6), pages 1185-1216, June.
- Andrew K. Rose & Lars E.O. Svensson, 1993. "European Exchange Rate Credibility Before the Fall," NBER Working Papers 4495, National Bureau of Economic Research, Inc.
- Rose, Andrew K & Svensson, Lars E O, 1993. "European Exchange Rate Credibility Before the Fall," CEPR Discussion Papers 852, C.E.P.R. Discussion Papers.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996.
"The twin crises: the causes of banking and balance-of-payments problems,"
International Finance Discussion Papers
544, Board of Governors of the Federal Reserve System (U.S.).
- Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
- Reinhart, Carmen & Kaminsky, Graciela, 2000.
"Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
[The twin crises: Te causes of banking and balance of payments problems]," MPRA Paper 13842, University Library of Munich, Germany.
- Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
- Arestis, Philip & Demetriades, Panicos O, 1997.
"Financial Development and Economic Growth: Assessing the Evidence,"
Royal Economic Society, vol. 107(442), pages 783-799, May.
- Panicos O. Demetriades & Philip Arestis, 1996. "Financial Development and Economic Growth: Assessing the Evidence," Keele Department of Economics Discussion Papers (1995-2001) 96/16, Department of Economics, Keele University.
- Jeffrey A. Frankel & Andrew K. Rose, 1996.
"Currency crashes in emerging markets: an empirical treatment,"
International Finance Discussion Papers
534, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Salih N. Neftci, 1998. "FX Short Positions, Balance Sheets and Financial Turbulence: An Interpretation of the Asian Financial Crisis," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 1998-18, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
- Flood, Robert & Marion, Nancy, 1999.
"Perspectives on the Recent Currency Crisis Literature,"
International Journal of Finance & Economics,
John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
- Nancy P. Marion & Robert P Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, .
- Robert Flood & Nancy Marion, 1998. "Perspectives on the Recent Currency Crisis Literature," NBER Working Papers 6380, National Bureau of Economic Research, Inc.
- Rodrigo O. Valdes & Ilan Goldfajn, 1997.
"Are Currency Crises Predictable?,"
IMF Working Papers
- J. A. Kregel, 1998.
"Derivatives and Global Capital Flows: Applications to Asia,"
- Kregel, J A, 1998. "Derivatives and Global Capital Flows: Applications to Asia," Cambridge Journal of Economics, Oxford University Press, vol. 22(6), pages 677-692, November.
- Jan A. Kregel, 1998. "Derivatives and Global Capital Flows: Applications to Asia," Economics Working Paper Archive wp_246, Levy Economics Institute.
- Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
- Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
- Catherine A Pattillo & Andrew Berg, 1998.
"Are Currency Crises Predictable? A Test,"
IMF Working Papers
- M. Brownbridge & C. Kirkpatrick, 2000. "Financial Regulation in Developing Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 37(1), pages 1-24, October.
- Barry Eichengreen & Richard Portes, 1997. "Managing financial crises in emerging markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 193-225.
- C. E. Weller, 2001.
"Financial Crises After Financial Liberalisation: Exceptional Circumstances or Structural Weakness?,"
Journal of Development Studies,
Taylor & Francis Journals, vol. 38(1), pages 98-127.
- Weller, Christian E., 1999. "Financial crises after financial liberalization: Exceptional circumstances or structural weakness?," ZEI Working Papers B 15-1999, University of Bonn, ZEI - Center for European Integration Studies.
- Singh, A. & Weisse, B. A., 1998.
"Emerging Stock Markets, Portfolio Capital Flows and Long-term Economic Growth: Micro and Macroeconomic Perspectives,"
Accounting and Finance Discussion Papers
98-af40, Faculty of Economics, University of Cambridge.
- Singh, Ajit & Weisse, Bruce A., 1998. "Emerging stock markets, portfolio capital flows and long-term economie growth: Micro and macroeconomic perspectives," World Development, Elsevier, vol. 26(4), pages 607-622, April.
- International Monetary Fund, 1998. "Leading Indicators of Banking Crises; Was Asia Different?," IMF Working Papers 98/91, .
- Hali J. Edison, 2000.
"Do indicators of financial crises work? an evaluation of an early warning system,"
International Finance Discussion Papers
675, Board of Governors of the Federal Reserve System (U.S.).
- Hali J. Edison, 2003. "Do indicators of financial crises work? An evaluation of an early warning system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 11-53.
- Marc Klau & John Hawkins, 2000. "Measuring potential vulnerabilities in emerging market economies," BIS Working Papers 91, Bank for International Settlements.
- Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
- Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-115, March.
When requesting a correction, please mention this item's handle: RePEc:eej:eeconj:v:29:y:2003:i:2:p:243-258. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Victor Matheson, College of the Holy Cross)
If references are entirely missing, you can add them using this form.