A Forewarning Indicator System for Financial Crises: The Case of Six Central and Eastern European Countries

31 Pages Posted: 23 May 2007 Last revised: 11 May 2010

See all articles by Irène Andreou

Irène Andreou

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Gilles Dufrénot

GREQAM and Aix-Marseille School of Economics

Alain Sand

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Aleksandra Zdzienicka

International Monetary Fund (IMF)

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

Andreou, Irène and Dufrénot, Gilles and Sand, Alain and Zdzienicka, Aleksandra, A Forewarning Indicator System for Financial Crises: The Case of Six Central and Eastern European Countries (April 1, 2007). William Davidson Institute Working Paper No. 901, GATE Working Paper No. 07-09, Available at SSRN: https://ssrn.com/abstract=988071 or http://dx.doi.org/10.2139/ssrn.988071

Irène Andreou (Contact Author)

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

Gilles Dufrénot

GREQAM and Aix-Marseille School of Economics ( email )

Centre de la vieille Charité
2 rue de la Charité
13002 Marseille, 13236
France

Alain Sand

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

Aleksandra Zdzienicka

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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