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Effectiveness Of Early Warning Models: A Critical Review And New Agenda For Future Direction

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  • Rakesh Padhan

    (India)

  • K. P. Prabheesh

    (Indian Institute of Technology)

Abstract

This paper suggests a new agenda for constructing early warning models (EWMs) to enhance their effectiveness in predicting financial crises. The central argument of the new agenda aims to eradicate the weaknesses of existing EWMs, since their failure to predict the global financial crisis of 2007–2008 demonstrates the need to improve their efficiency. We document the history of EWMs and propose a new agenda as follows: 1) the accurate measurement of a financial crisis, 2) implementation of a fourthgeneration crisis model to capture the dynamic nature of the financial crisis, and 3) the inclusion of interconnectedness/contagion variables as explanatory variables for the financial crisis.

Suggested Citation

  • Rakesh Padhan & K. P. Prabheesh, 2019. "Effectiveness Of Early Warning Models: A Critical Review And New Agenda For Future Direction," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 22(4), pages 457-484, December.
  • Handle: RePEc:idn:journl:v:22:y:2019:i:4d:p:457-484
    DOI: https://doi.org/10.21098/bemp.v22i4.1188
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    More about this item

    Keywords

    Early Warning Models; Financial Crisis; Contagion; Global Financial Crisis; Crisis Generation Models;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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