IMF Working Papers

A Perspectiveon Predicting Currency Crises

Author/Editor:

Robert P Flood ; Juan Yepez ; Nancy P. Marion

Publication Date:

October 1, 2010

Electronic Access:

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Summary:

Currency crises are difficult to predict. It could be that we are choosing the wrong variables or using the wrong models or adopting measurement techniques not up to the task. We set up a Monte Carlo experiment designed to evaluate the measurement techniques. In our study, the methods are given the right fundamentals and the right models and are evaluated on how closely the estimated predictions match the objectively correct predictions. We find that all methods do reasonably well when fundamentals are explosive and all do badly when fundamentals are merely highly volatile.

Series:

Working Paper No. 10/227

Subject:

Currencies Currency crises Devaluation Economic forecasting Financial crisis Forecasting models