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Identifying the Early Warnings of Currency Crisis in India

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  • Balaga Mohana Rao
  • Puja Padhi

Abstract

We empirically investigate the recent history of currency crises (stress periods) and the factors influencing their likelihood in India. This study aims at constructing an early warning system (EWS) to forecast the possibility of an imminent crisis in the crisis window of 12 months by employing signal extraction methodology and logistic regression model for the period 1986–2015. Among the 22 identified crisis months (stress periods), only early episodes (1990–1991) were followed by a devaluation and not the later periods (post 1991). Both signal extraction methodology and logistic regression model indicate no relative importance to the three generations of currency crises models. Nevertheless, the results advocate that logistic regression model fares better than signal extraction technique. The results also suggest that building an EWS can be an effective diagnostic technique. JEL Codes: F31, F47, G01

Suggested Citation

  • Balaga Mohana Rao & Puja Padhi, 2019. "Identifying the Early Warnings of Currency Crisis in India," Foreign Trade Review, , vol. 54(4), pages 269-299, November.
  • Handle: RePEc:sae:fortra:v:54:y:2019:i:4:p:269-299
    DOI: 10.1177/0015732519874206
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    More about this item

    Keywords

    Currency crisis; early warning system; India;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises

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