Early Warning Systems: A Survey and a Regime-Switching Approach

IMF Working Paper No. 03/32

60 Pages Posted: 5 Jan 2005

See all articles by Abdul G. Abiad

Abdul G. Abiad

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: February 2003

Abstract

Previous early-warning systems (EWSs) for currency crises have relied on models that require a priori dating of crises. This paper proposes an alternative EWS, based on a Markov-switching model, which identifies and characterizes crisis periods endogenously; this also allows the model to utilize information contained in exchange rate dynamics. The model is estimated using data for the period 1972-99 for the Asian crisis countries, taking a country-by-country approach. The model outperforms standard EWSs, both in signaling crises and reducing false alarms. Two lessons emerge. First, accounting for the dynamics of exchange rates is important. Second, different indicators matter for different countries, suggesting that the assumption of parameter constancy underlying panel estimates of EWSs may contribute to poor performance.

Keywords: Currency crisis, early warning system, regime-switching, Markov-switching

JEL Classification: C22, C53, F47

Suggested Citation

Abiad, Abdul G., Early Warning Systems: A Survey and a Regime-Switching Approach (February 2003). IMF Working Paper No. 03/32. Available at SSRN: https://ssrn.com/abstract=581141 or http://dx.doi.org/10.2139/ssrn.581141

Abdul G. Abiad (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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