Monitoring and Forecasting Currency Crises |
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Authors: | ATSUSHI INOUE,BARBARA ROSSI&dagger |
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Affiliation: | Atsushi Inoue;is from the Department of Economics, University of British Columbia (E-mail:) . Barbara Rossi;is from the Department of Economics, Duke University, Durham NC 27708 (E-mail:). |
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Abstract: | Can we improve forecasts of currency crises by using a large number of predictors? Which predictors should we use? This paper evaluates the performance of traditional leading indicators and a new Diffusion Index (DI) method as Early Warning Systems to monitor the risk and forecast the likelihood of the recent currency crises in East Asia. We find that the DI performs quite well in real time. For most countries, the forecasted probabilities of a crisis increase substantially around the actual time of the crisis. The economic variables that help in forecasting future crises are output growth, interest rates and money growth. |
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Keywords: | F3 F4 C1 |
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