Comparing Parametric and Non-parametric Early Warning Systems for Currency Crises in Emerging Market Economies

Author/Editor:

Fabio Comelli

Publication Date:

May 30, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The purpose of this paper is to compare in-sample and out-of-sample performances of three parametric and non-parametric early warning systems (EWS) for currency crises in emerging market economies (EMs). The parametric EWS achieves superior out-of-sample results compared to the non-parametric EWS, as the total misclassification error of the former is lower than that of the latter. In addition, we find that the performances of the parametric and non-parametric EWS do not improve if the policymaker becomes more prudent. From a policy perspective, the policymaker faces the standard trade-off when using EWS. Greater prudence allows the policymaker to correctly call more crisis episodes, but this comes at the cost of issuing more false alarms. The benefit of correctly calling more currency crises needs to be traded off against the cost of issuing more false alarms and of implementing corrective macroeconomic policies prematurely.

Series:

Working Paper No. 2013/134

Subject:

Central banks Currency crises Early warning systems Financial crises Global financial crisis of 2008-2009 International reserves

English

Publication Date:

May 30, 2013

ISBN/ISSN:

9781484300589/1018-5941

Stock No:

WPIEA2013134

Pages:

29

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