The Federal Reserve Board eagle logo links to home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Do Indicators of Financial Crises Work? An Evaluation of an Early Warning System
Hali J. Edison
2000-675  (July 2000)

Abstract:  The object of this paper is to develop an operational early warning system (EWS) that can detect financial crises. To achieve this goal the paper analyzes and extends the early warning system developed by Kaminsky, Lizondo, and Reinhart (1998) and Kaminsky and Reinhart (1999) that is based on the "signal" approach. This system monitors several indicators that tend to exhibit an unusual behavior in the periods preceding a crisis. When an indicator exceeds (or falls below) a threshold, then it is said to issue a "signal" that a currency crisis may occur within a given period. The model does a fairly good job of anticipating some of the crises in 1997/1998, but several weaknesses to the approach are identified. The paper also evaluates how this system can be applied to an individual country. On balance, the results in this paper are mixed, but the results suggest that an early warning system should be thought of as a useful diagnostic tool.

Full paper (463 KB PDF) | Full paper (3866 KB Postscript)

Currency Crises, vulnerability indicators, Asian crisis, balance of payments crisis, crisis prediction

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 2000 IFDPs
To comment on this site, please fill out our feedback form.
Last update: July 19, 2001