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Monitoring and Forecasting Currency Crises

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  • ATSUSHI INOUE
  • BARBARA ROSSI

Abstract

Can we improve forecasts of currency crises by using a large number of predictors? Which predictors should we use? This paper evaluates the performance of traditional leading indicators and a new Diffusion Index (DI) method as Early Warning Systems to monitor the risk and forecast the likelihood of the recent currency crises in East Asia. We find that the DI performs quite well in real time. For most countries, the forecasted probabilities of a crisis increase substantially around the actual time of the crisis. The economic variables that help in forecasting future crises are output growth, interest rates and money growth.

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  • Atsushi Inoue & Barbara Rossi, 2008. "Monitoring and Forecasting Currency Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2‐3), pages 523-534, March.
    • Handle: RePEc:wly:jmoncb:v:40:y:2008:i:2-3:p:523-534
    DOI: 10.1111/j.1538-4616.2008.00125.x
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    Cited by:

    1. Cipollini, A. & Kapetanios, G., 2009. "Forecasting financial crises and contagion in Asia using dynamic factor analysis," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 188-200, March.
    2. Mirjana Jemović & Srđan Marinković, 2021. "Determinants of financial crises—An early warning system based on panel logit regression," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 103-117, January.
    3. repec:dgr:rugsom:12005-eef is not listed on IDEAS
    4. Hyeyoen Kim, 2011. "Large Data Sets, Nonlinearity and the Speed of Adjustment to Real Exchange Rate Shocks," Post-Print hal-00665456, HAL.
    5. Teuta Ismaili Muharremi, 2015. "Currency Crisis Revisited: A Literature Review," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(6), pages 117-124, December.
    6. Ryota Nakatani, 2017. "The Effects of Productivity Shocks, Financial Shocks, and Monetary Policy on Exchange Rates: An Application of the Currency Crisis Model and Implications for Emerging Market Crises," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(11), pages 2545-2561, November.
    7. Boonman, Tjeerd M. & Jacobs, Jan P.A.M. & Kuper, Gerard H., 2012. "The Global Financial Crisis and currency crises in Latin America," Research Report 12005-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    8. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
    9. Gatopoulos, Georgios & Loubergé, Henri, 2013. "Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 54-75.

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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