Leading Indicators of Currency Crises

IMF Working Papers, July 1, 1997

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Leading Indicators of Currency Crises

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Bibliographic details

• Authors: Graciela Laura Kaminsky
• Published: July 1, 1997
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451955866.001

Overview

• This paper examines the empirical evidence on currency crises and proposes a specific early warning system.
• The early warning system monitors several indicators that tend to exhibit unusual behavior in the periods preceding a crisis.
• When an indicator exceeds a certain threshold value, it is interpreted as a warning “signal” that a currency crisis may take place within the following 24 months.

Early warning system: methodology and interpretation

• Monitor the evolution of several indicators over time.
• Define threshold values for each indicator; exceeding a threshold constitutes a warning “signal.”
• A signal implies an elevated probability that a currency crisis may occur within the following 24 months.

Variables with the best track record (as identified in the paper)

• Exports
• Deviations of the real exchange rate from trend
• The ratio of broad money to gross international reserves
• Output
• Equity prices

Key findings and emphases

• Specific indicators tend to show unusual behavior before currency crises.
• The combination of indicator monitoring and threshold-based signaling forms a practical early warning system.
• The approach focuses on predicting crises within a 24-month horizon following a signal.

Subjects and keywords (as listed)

• Subjects: Central banks, Currency crises, Currency markets, Early warning systems, Financial crises, Financial markets, Foreign exchange, International reserves, Real exchange rates
• Keywords include: balance-of-payments crisis, banking crisis help, break, crisis, currency, Currency Crises, Currency markets, Early warning systems, exchange rate band, GDP, International reserves, Leading Indicators, looming crisis, money demand, money multiplier, nominal exchange rate, price level, procedure, Real exchange rates, self-fulfilling crisis, shadow exchange rate, short-term debt, Survey, WP

Content in this bundle

• Leading Indicator of Currency Crisis - WP/97/79
  • Leading Indicator of Currency Crisis - WP/97/79 (Markdown version)
  • Leading Indicator of Currency Crisis - WP/97/79 (PDF)