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Keywords

Early warning systems; currency crises; out-of-sample performance

Abstract

We compare how logit (fixed effects) and probit early warning systems (EWS) predict in-sample and out-of-sample currency crises in emerging markets (EMs). We look at episodes of currency crises that took place in 29 EMs between January 1995 and December 2012. Stronger real GDP growth rates and higher net foreign assets significantly reduce the probability of experiencing a currency crisis, while high levels of credit to the private sector increase it. We find that the logit and probit EWS out-of-sample performances are broadly similar, and that the EWS performance can be very sensitive both to the size of the estimation sample, and to the crisis definition employed. For macroeconomic policy purposes, we conclude that a currency crisis definition identifying more rather than less crisis episodes should be used, even if this may lead to the risk of issuing false alarms.

First Page

5

Last Page

22

Page Count

18

Received Date

University of Warsaw

Revised Date

23 January 2016

Accept Date

13 April 2016

Online Available Date

16 June 2016

DOI

10.7172/2353-6845.jbfe.2016.2.1

JEL Code

F30; F32; F37

Publisher

16 June 2016

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