An 'Almost-Too-Late' Warning Mechanism for Currency Crises
25 Pages Posted: 20 Jul 2007
Date Written: February 23, 2007
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: Suggested Citation