Early Warning for Currency Crises: What is the Role of Financial Openness?

22 Pages Posted: 6 Aug 2014

See all articles by Jon Frost

Jon Frost

Bank for International Settlements; De Nederlandsche Bank; University of Cambridge - Cambridge Centre for Alternative Finance

Ayako Saiki

University of London - School of Oriental and African Studies (SOAS); De Nederlandsche Bank - Monetary and Economic Policy Department

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Date Written: September 2014

Abstract

The paper explores whether financial openness — capital account openness and gross capital inflows — makes countries vulnerable to currency crises. A quarterly dataset on 46 advanced and emerging market economies (AEs and EMEs) during 1975Q1–2011Q4 is used, with the period after Q2 2007 used for out‐of‐sample testing. The key findings are: (1) capital account openness is associated with lower probability of currency crises, but less so for EMEs; (2) surges in gross capital flows are associated with increased risk of currency crises; and (3) the model performs well out‐of‐sample, confirming that early warning models are helpful in judging relative vulnerability.

Suggested Citation

Frost, Jon and Saiki, Ayako, Early Warning for Currency Crises: What is the Role of Financial Openness? (September 2014). Review of International Economics, Vol. 22, Issue 4, pp. 722-743, 2014, Available at SSRN: https://ssrn.com/abstract=2476699 or http://dx.doi.org/10.1111/roie.12124

Jon Frost (Contact Author)

Bank for International Settlements ( email )

Basel
Switzerland

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

University of Cambridge - Cambridge Centre for Alternative Finance ( email )

10 Trumpington Street
Cambridge, CB21QA
United Kingdom

Ayako Saiki

University of London - School of Oriental and African Studies (SOAS)

10 Thornhaugh Street
Russell Square
London, WC1H 0XG
United Kingdom

De Nederlandsche Bank - Monetary and Economic Policy Department

POBox 98
Amsterdam, 1000AB
Netherlands

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