A Forewarning Indicator System for Financial Crises: The Case of Six Central and Eastern European Countries
William Davidson Institute Working Paper No. 901
GATE Working Paper No. 07-09
31 Pages Posted: 23 May 2007 Last revised: 11 May 2010
Date Written: April 1, 2007
Abstract
We propose a measure of the probability of crises associated with an aggregate indicator, where the percentage of false alarms and the proportion of missed signals can be combined to give an appreciation of the vulnerability of an economy. In this perspective, the important issue is not only to determine whether a system produces true predictions of a crisis, but also whether there are forewarning signs of a forthcoming crisis prior to its actual occurrence. To this end, we adopt the approach initiated by Kaminsky, Lizondo and Reinhart (1998), analyzing each indicator and calculating each threshold separately. We depart from this approach in that each country is also analyzed separately, permitting the creation of a more "custom-made" early warning system for each one.
Keywords: Currency Crisis, Early Warning System, Composite Indicator, Eastern
JEL Classification: F31, F47
Suggested Citation: Suggested Citation
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