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Can We Predict the Next Capital Account Crisis?

  • Marcos Chamon
  • Paolo Manasse
  • Alessandro Prati

This paper uses binary classification trees (BCTs) to predict capital account crises. BCTs successively compare candidate variables and thresholds to split the data into two subsamples, allowing for a large number of indicators to be considered and complex interactions to emerge in a way that standard regressions cannot easily replicate. We identify a robust leading indicator role for three variables (international reserves, current account balance, and short-term external debt) as well as a reserve cover measure that combines them. External indebtedness and domestic GDP growth forecasts are also important predictors of vulnerability. Out of sample, we were able to capture some of the main emerging market crises with relatively few false alarms but the overall out-of-sample performance of our forecasts was mixed. Global cyclical variables help explain vulnerability to crises but they are difficult to predict and, therefore, are of limited use for forecasting purposes. IMF Staff Papers (2007) 54, 270–305. doi:10.1057/palgrave.imfsp.9450012

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Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 54 (2007)
Issue (Month): 2 (June)
Pages: 270-305

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Handle: RePEc:pal:imfstp:v:54:y:2007:i:2:p:270-305
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  1. 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.
  2. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  3. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
  4. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
  5. Jeffrey A. Frankel & Shang-Jin Wei, 2004. "Managing Macroeconomic Crises," NBER Working Papers 10907, National Bureau of Economic Research, Inc.
  6. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
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