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Forecasting Financial Crises by Applying the “Temple Model of Financial Crises” Against the Background of the Indonesian Experience

Author

Listed:
  • Muhammad Handry Imansyah

    (Faculty of Economics, Lambung Mangkurat University, Indonesia)

  • Armin J. Kammel

    (The Center for European Interation at Danube University Krems, Austria)

Abstract

The objective of the paper is to reconsider the so-called Temple Model of Financial Crises” (TMFC) by extending it to a model to detect financial crises. In this regard, the extended model will be applied to the Indonesian experience. As financial and banking crises in 1997 seriously affected Indonesia, the Indonesian economy contracted by -13%, the inflation rate jumped by 70% and domestic government debt skyrocketed by Rp 650 trillions. The model is a non-parametric approach, also known as signal approach. The result of this signaling approach is relatively adequate in the sense that the composite index sends a signal regarding the danger of upcoming financial crises – as shown in the cases of 1978, 1983, 1986 – with a 24 months window period. The performance of the model is satisfactory in terms of in-sample and out-of-sample evaluation using accuracy and calibration scores. Moreover, the model is much better able to forecast the 1997 crisis as well as the financial distress in August 2005 and in 2008. Therefore, the paper offers a useful combination of TMFC incorporating a signal approach.

Suggested Citation

  • Muhammad Handry Imansyah & Armin J. Kammel, 2009. "Forecasting Financial Crises by Applying the “Temple Model of Financial Crises” Against the Background of the Indonesian Experience," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 57, pages 277-306, December.
    • Handle: RePEc:lpe:efijnl:200913
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    References listed on IDEAS

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    More about this item

    Keywords

    financial crises; Indonesia; temple model of financial crises; early warning systems; crises prediction; vulnerability indicators; signal approach.;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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