An 'Almost-Too-Late' Warning Mechanism for Currency Crises

25 Pages Posted: 20 Jul 2007

See all articles by Jesús Crespo Cuaresma

Jesús Crespo Cuaresma

University of Innsbruck - Department of Economic Theory, Economic Policy and Economic History

Tomas Slacik

Austrian National Bank - Foreign Research Division

Date Written: February 23, 2007

Abstract

We propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants. Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month. We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998.

Keywords: currency crisis, term structure of interest rates, transition economies

JEL Classification: F31, F34, E43

Suggested Citation

Crespo Cuaresma, Jesús and Slacik, Tomas, An 'Almost-Too-Late' Warning Mechanism for Currency Crises (February 23, 2007). BOFIT Discussion Paper No. 4/2007. Available at SSRN: https://ssrn.com/abstract=1001670 or http://dx.doi.org/10.2139/ssrn.1001670

Jesús Crespo Cuaresma

University of Innsbruck - Department of Economic Theory, Economic Policy and Economic History ( email )

Universitaetsstrasse 15
Innsbruck, A - 6020
Austria

Tomas Slacik (Contact Author)

Austrian National Bank - Foreign Research Division ( email )

Otto-Wagner-Platz 3
Vienna, A-1011
Austria

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