Leading indicators of currency crises

Abstract

The authors examine the empirical evidence on currency crises and propose a specific early-warning system. This system involves monitoring the evolution of several indicators that tend to exhibit unusual behavior in the periods preceding a crisis. An indicator exceeding a certain threshold value should be interpreted as a warning"signal"that a currency crisis may take place within the following 24 months. The threshold values are calculated to strike a balance between the risk of having many false signals and the risk of missing many crises. Within this approach, the variables with the best track record include exports, deviations of the real exchange rate from trend, the ratio of broad money to gross international reserves, output, and equity prices. The evidence does not support some of the other indicators that were considered, including imports, bank deposits,the difference between foreign and domestic real deposit interest rates, and the ratio of lending to deposit interest rates.Payment Systems&Infrastructure,Economic Theory&Research,Fiscal&Monetary Policy,Environmental Economics&Policies,Labor Policies,Economic Theory&Research,Macroeconomic Management,Economic Stabilization,Environmental Economics&Policies,Financial Economics