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Robust Lessons about Practical Early Warning Systems

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  • Sawischlewski, Katja
  • Menkhoff, Lukas
  • Beckmann, Daniela

Abstract

Early warning systems (EWSs) are subject to restrictions that apply to exchange rates in general: fundamentals matter but their influence is small and unstable. Keeping this in mind, five lessons emerge : First, EWSs have robust forecasting power and thus help policy-makers to prevent crises. Second, among competing crisis definitions there is one which is most practical. Third, take a logit model to condense information from various fundamental variables. Fourth, add a regional contagion dummy to the standard set of variables. Fifth, one may be tempted to address instability over time and countries by taking shorter samples and regional EWSs.

Suggested Citation

  • Sawischlewski, Katja & Menkhoff, Lukas & Beckmann, Daniela, 2005. "Robust Lessons about Practical Early Warning Systems," Proceedings of the German Development Economics Conference, Kiel 2005 3, Verein für Socialpolitik, Research Committee Development Economics.
    • Handle: RePEc:zbw:gdec05:3476
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    More about this item

    Keywords

    early warning system; currency crises; emerging markets;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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