Early Warning Systems of Currency Crises

Early warning systems (EWS) are from applied economics, aiming at predicting and preventing crises by developing econometric models. The East Asian currency crisis of 1997 to 1998 left lessons for both academic researchers and policy makers that crisis affects not only ground-zero countries but also neighboring economies. EWS contributes to fostering crisis-proof economies by policy monitoring in tranquil periods, predicting crises and taking preemptive measures, and distinguishing crisis causes between fundamentals and contagion. It also benefits Japan's external policy since it can foresee to which countries a crisis will spread once it occurs. This paper will, after reviewing the two major streams of EWS, the signal and regression approaches, extend a benchmark model of the regression approach and discuss challenges in developing EWS further.