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User's guide to an early warning system for macroeconomic vulnerability in Latin American countries

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  • Herrara, Santiago
  • Garcia, Conrado

Abstract

The authors develop an early warning system for macroeconomic vulnerability for several Latin American countries, drawing on the work of Kaminsky, Lizondo, and Reinhart (1997) and Kaminsky (1988). They build a composite leading indicator that signals macroeconomic vulnerability, showing that, historically, crises tend to happen in certain"vulnerable"situations. Interested mainly in providing an operational tool, the authors use a different approach to the problem than Kaminsky did. First, they use fewer variables to generate the signals. Then, after the variables are aggregated, a signal is issued, depending on the behavior of the composite index. (Kaminsky's procedure was to generate signals with each variable and then aggregate them.) Their results are satisfactory both statistically and operationally. Statistically, Type I and II errors are smaller than those reported in previous papers. Operationally, this system of leading indicators is less costly to maintain, given fewer variables-which are widely available and reported with timeliness. The authors tested the models'out-of-sample predictive ability on crises that occurred after the first stage of their project was finished: Colombia (September 1998), Brazil (January 1999), and Ecuador (February 1999). In all cases the models correctly anticipated the speculative attacks. Moreover, Mexico's models, estimated with information available two years before the 1994 crisis, show that these signaling devices would have been useful for signaling the macroeconomic vulnerability before December 1994.

Suggested Citation

  • Herrara, Santiago & Garcia, Conrado, 1999. "User's guide to an early warning system for macroeconomic vulnerability in Latin American countries," Policy Research Working Paper Series 2233, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2233
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. María José Gil-Moltó & Joanna Poyago-Theotoky & Vasileios Zikos, 2006. "R&D policy and privatization in a mixed oligopoly," Discussion Paper Series 2006_25, Department of Economics, Loughborough University.
    2. Frankel, Jeffrey & Saravelos, George, 2012. "Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis," Journal of International Economics, Elsevier, vol. 87(2), pages 216-231.
    3. Dabla-Norris, Era & Bal Gündüz, Yasemin, 2014. "Exogenous Shocks and Growth Crises in Low-Income Countries: A Vulnerability Index," World Development, Elsevier, vol. 59(C), pages 360-378.
    4. Libor Krkoska, 2001. "Assessing Macroeconomic Vulnerability in Central Europe," Post-Communist Economies, Taylor & Francis Journals, vol. 13(1), pages 41-55.
    5. Marcela Guachamín & Diana Ramírez‐Cifuentes & Olga Delgado, 2020. "An Uncertainty Thermometer to Measure the Macroeconomic‐Financial Risk in South American Countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 32(6), pages 854-890, August.
    6. World Bank, 2003. "China - Promoting Growth with Equity : Country Economic Memorandum," World Bank Other Operational Studies 14643, The World Bank.
    7. Mete Feridun, 2006. "Currency Crises in Emerging Markets: An Application of Signals Approach to Turkey," Discussion Paper Series 2006_26, Department of Economics, Loughborough University, revised Dec 2006.
    8. Herrera, Santiago & Perry, Guillermo, 2001. "Tropical bubbles : asset prices in Latin America, 1980-2001," Policy Research Working Paper Series 2724, The World Bank.
    9. Dufrénot, Gilles & Paret, Anne-Charlotte, 2019. "Power-law distribution in the external debt-to-fiscal revenue ratios: Empirical evidence and a theoretical model," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 341-359.
    10. Mete Feridun, 2007. "Determinants of Currency Crises in Emerging Markets: An Empirical Investigation on Turkey," Discussion Paper Series 2007_01, Department of Economics, Loughborough University, revised Jan 2007.
    11. Iskandar Simorangkir, 2011. "Bank Run Determinants in Indonesia: Bad Luck or Fundamental Factors?," EcoMod2011 3557, EcoMod.

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