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Monitoring and Forecasting Currency Crises

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  • ATSUSHI INOUE
  • BARBARA ROSSI

Abstract

Can we improve forecasts of currency crises by using a large number of predictors? Which predictors should we use? This paper evaluates the performance of traditional leading indicators and a new Diffusion Index (DI) method as Early Warning Systems to monitor the risk and forecast the likelihood of the recent currency crises in East Asia. We find that the DI performs quite well in real time. For most countries, the forecasted probabilities of a crisis increase substantially around the actual time of the crisis. The economic variables that help in forecasting future crises are output growth, interest rates and money growth. Copyright (c)2008 The Ohio State University.

Suggested Citation

  • Atsushi Inoue & Barbara Rossi, 2008. "Monitoring and Forecasting Currency Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 523-534, March.
  • Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:2-3:p:523-534
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    Cited by:

    1. Ryota Nakatani, 2014. "The Effects of Financial and Real Shocks, Structural Vulnerability and Monetary Policy on Exchange Rates from the Perspective of Currency Crises Models," UTokyo Price Project Working Paper Series 043, University of Tokyo, Graduate School of Economics.
    2. Boonman, Tjeerd M. & Jacobs, Jan P.A.M. & Kuper, Gerard H., 2012. "The Global Financial Crisis and currency crises in Latin America," Research Report 12005-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    3. Cipollini, A. & Kapetanios, G., 2009. "Forecasting financial crises and contagion in Asia using dynamic factor analysis," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 188-200, March.
    4. repec:dgr:rugsom:12005-eef is not listed on IDEAS
    5. Hyeyoen Kim, 2011. "Large Data Sets, Nonlinearity and the Speed of Adjustment to Real Exchange Rate Shocks," Post-Print hal-00665456, HAL.
    6. Teuta Ismaili Muharremi, 2015. "Currency Crisis Revisited: A Literature Review," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(6), pages 117-124, December.
    7. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
    8. Gatopoulos, Georgios & Loubergé, Henri, 2013. "Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 54-75.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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