## Early Warning Systems: A Survey and a Regime-Switching Approach

_IMF Working Papers, February 1, 2003_

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## Bibliographic details
- Authors: Abdul d Abiad
- Published: February 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451845136.001

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### Summary
- 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:
  - Identifies and characterizes crisis periods endogenously.
  - Utilizes information contained in exchange rate dynamics.
- 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:
  - Signaling crises.
  - Reducing false alarms.

### Methodology
- 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.

### Key Findings
- The Markov-switching EWS outperforms standard EWSs on both detection and false-alarm reduction.
- Two main lessons emerge:
  - Accounting for the dynamics of exchange rates is important.
  - Different indicators matter for different countries; the assumption of parameter constancy underlying panel estimates of EWSs may contribute to poor performance.

### Subjects and Keywords
- 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

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/early-warning-systems-a-survey-and-a-regime-switching-approach-16293_