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Robust Lessons about Practical Early Warning Systems

Publication Date
  • F31
  • F33
  • F37
  • Ddc:330
  • Early Warning System
  • Currency Crises
  • Emerging Markets


Early warning systems (EWSs) are subject to restrictions that apply to exchange rates in general: fundamentals matter but their influence is small and unstable. Keeping this in mind, five lessons emerge : First, EWSs have robust forecasting power and thus help policy-makers to prevent crises. Second, among competing crisis definitions there is one which is most practical. Third, take a logit model to condense information from various fundamental variables. Fourth, add a regional contagion dummy to the standard set of variables. Fifth, one may be tempted to address instability over time and countries by taking shorter samples and regional EWSs.

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