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Robust Lessons about Practical Early Warning Systems

  • Beckmann, Daniela
  • Menkhoff, Lukas
  • Sawischlewski, Katja

Early warning systems (EWSs) are subject to restrictions that apply to exchange rates in general: fundamentals matter but their influence is small and unstable. Despite this limitation four major lessons emerge: First, EWSs have robust forecasting power and thus help policy-makers to prevent crises. Second, policy-makers must decide about some EWSs elements, such as the sensitivity of the forecasts. Third, EWSs performance is increased by taking a logit model, shorter samples and a regional approach. Fourth, the finding of contagion may motivate policy to shield its economy against inefficient international financial markets.

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Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-322.

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Length: 36 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:han:dpaper:dp-322
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