Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies
IMF Working Papers, April 17, 2014
Source details
- Canonical URL
- Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies
Other formats
Bibliographic details
- Authors: Fabio Comelli
- Published: April 17, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484355282.001
Summary
- Compares how logit (fixed effects) and probit early warning systems (EWS) predict in-sample and out-of-sample currency crises in emerging markets (EMs).
- Sample covers episodes of currency crises that took place in 29 EMs between January 1995 and December 2012.
- Main behavioral findings:
- Stronger real GDP growth rates significantly reduce the probability of experiencing a currency crisis.
- Higher net foreign assets significantly reduce the probability of experiencing a currency crisis.
- High levels of credit to the private sector increase the probability of experiencing a currency crisis.
- Overall finding on model performance: logit and probit EWS out-of-sample performances are broadly similar.
- Noted sensitivity: EWS performance can be very sensitive to both the size of the estimation sample and to the crisis definition employed.
- Policy conclusion: For macroeconomic policy purposes, a currency crisis definition identifying more rather than less crisis episodes should be used, even if this may lead to the risk of issuing false alarms.
Methodology and Scope
- Econometric approaches compared: logit (fixed effects) and probit EWS.
- Geographic and temporal scope: 29 emerging market economies; January 1995–December 2012.
Key Results and Statistics
- Sample size: 29 EMs.
- Time period: January 1995 to December 2012.
- Pages: 26.
- Volume: 2014.
- Issue: 065.
- Series: Working Paper No. 2014/065.
- DOI: https://doi.org/10.5089/9781484355282.001
- Stock No: WPIEA2014065
- ISBN: 9781484355282
- ISSN: 1018-5941
Policy Implications and Recommendations
- Use a crisis definition that identifies more crisis episodes for macroeconomic policy guidance, accepting increased risk of false alarms to improve early detection.
- Monitor and address:
- Weak real GDP growth as a risk factor for currency crises.
- Low net foreign assets as a risk factor for currency crises.
- High credit to the private sector as a build-up of crisis vulnerability.
- Consider sensitivity of EWS outputs to estimation-sample size and crisis-definition choices when designing surveillance and early-warning frameworks.
IMF Working Paper by Fabio Comelli, April 17, 2014.
Content in this bundle
- _wp1465 - References