{
  "title": "Early Warning Systems: A Survey and a Regime-Switching Approach",
  "publication": "IMF Working Papers, February 1, 2003",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/early-warning-systems-a-survey-and-a-regime-switching-approach-16293",
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  "summary": "Previous early-warning systems (EWSs) for currency crises have relied on models that require a priori dating of crises. This paper proposes an alternative EWS, based on a Markov-switching model, which identifies and characterizes crisis periods endogenously; this also allows the model to utilize inf",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Previous early-warning systems (EWSs) for currency crises rely on models that require a priori dating of crises.\n- This paper proposes an alternative EWS based on a Markov-switching model that:\n  - Identifies and characterizes crisis periods endogenously.\n  - Utilizes information contained in exchange rate dynamics.\n- Model estimation is done using data for the period 1972-99 for the Asian crisis countries, taking a country-by-country approach.\n- The Markov-switching model outperforms standard EWSs in:\n  - Signaling crises.\n  - Reducing false alarms."
    },
    {
      "heading": "Methodology",
      "content": "- Core approach: Markov-switching (regime-switching) model that allows endogenous identification of crisis episodes and incorporates exchange rate dynamics.\n- Estimation: Country-by-country estimation for Asian crisis countries using data from 1972-99."
    },
    {
      "heading": "Key Findings",
      "content": "- The Markov-switching EWS outperforms standard EWSs on both detection and false-alarm reduction.\n- Two main lessons emerge:\n  - Accounting for the dynamics of exchange rates is important.\n  - Different indicators matter for different countries; the assumption of parameter constancy underlying panel estimates of EWSs may contribute to poor performance."
    },
    {
      "heading": "Subjects and Keywords",
      "content": "- Subject: Currency crises, Early warning systems, Econometric analysis, Exchange rates, Financial crises, Foreign exchange, Markov-switching models\n- Keywords: crisis date, crisis duration, crisis index, crisis measure, crisis probability, crisis vulnerability, crisis-identification threshold, Currency crises, Currency crisis, discriminant analysis, early warning system, Early warning systems, exchange rate, Exchange rates, Global, growth rate, identification method, Markov chain, Markov switching, Markov-switching models, nominal exchange rate, regime switching, short-term debt, WP\n\n---\n\n Content in this bundle\n\n- Early-Warning Systems: A Survey and a Regime-Switching Approach - WP/03/32\n  - Early-Warning Systems: A Survey and a Regime-Switching Approach - WP/03/32 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Early-Warning Systems: A Survey and a Regime-Switching Approach - WP/03/32 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/early-warning-systems-a-survey-and-a-regime-switching-approach-16293"
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    "Authors: Abdul d Abiad",
    "Published: February 1, 2003",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451845136.001",
    "Previous early-warning systems (EWSs) for currency crises rely on models that require a priori dating of crises.",
    "This paper proposes an alternative EWS based on a Markov-switching model that:",
    "Model estimation is done using data for the period 1972-99 for the Asian crisis countries, taking a country-by-country approach.",
    "The Markov-switching model outperforms standard EWSs in:",
    "Core approach: Markov-switching (regime-switching) model that allows endogenous identification of crisis episodes and incorporates exchange rate dynamics.",
    "Estimation: Country-by-country estimation for Asian crisis countries using data from 1972-99.",
    "The Markov-switching EWS outperforms standard EWSs on both detection and false-alarm reduction.",
    "Two main lessons emerge:",
    "Subject: Currency crises, Early warning systems, Econometric analysis, Exchange rates, Financial crises, Foreign exchange, Markov-switching models",
    "Keywords: crisis date, crisis duration, crisis index, crisis measure, crisis probability, crisis vulnerability, crisis-identification threshold, Currency crises, Currency crisis, discriminant analysis, early warning system, Early warning systems, exchange rate, Exchange rates, Global, growth rate, identification method, Markov chain, Markov switching, Markov-switching models, nominal exchange rate, regime switching, short-term debt, WP",
    "**Early-Warning Systems: A Survey and a Regime-Switching Approach - WP/03/32**"
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