## Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies

_IMF Working Papers, April 17, 2014_

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## Bibliographic details
- Authors: Fabio Comelli
- Published: April 17, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484355282.001

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### 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/comparing-the-performance-of-logit-and-probit-early-warning-systems-for-currency-crises-in-41489_