Empirical Indicators of Currency Crises in East Asia

Emerging Markets Finance and Trade, 2010

This paper examines the probability of currency crises using a signal approach and a multivariate probit model. The results indicate that the signal approach can provide an effective warning system despite its nonparametric nature. The top three indicators that are useful in anticipating crises include international reserves, stock market indices, and GDP, respectively. Excess money balances and the ratio of domestic credit to GDP are significant and have positive correlation with the probability of a crisis. The growth rate of exports and the stock indices are significant and have a negative relationship with a crisis probability. Overall, the results indicate that government policies, the macroeconomic environment, and investor panic/self-fulfilling expectations all play a role in the making of a crisis.

Review of International …, 2002

The Asian currency crises have been introduced by many economists as evidence that almost any country could be vulnerable to speculative attacks and to contagion effects, even with apparently good economic fundamentals. These financial crises have also been interpreted by other economists as rational market reactions to the unsustainability of domestic macroeconomic policies or structural weaknesses. The objective of this paper is to evaluate the relative importance of macroeconomic unsustainability, financial vulnerability, and crisis contagion in a model that explains and predicts the Asian currency crises. Out-of-sample forecasts based on two-stage panel and logit regressions provide evidence of a pure contagion effect, which significantly worsened the crises. They also show that Indonesia was the only one of the six Asian nations examined (India, Indonesia, Malaysia, Philippines, South Korea, Thailand) that was in an unsustainable economic situation, and that the other five nations were only vulnerable to a currency crisis.

International investors' enthusiasm with respect to growth prospects in Southeast Asia has been followed by panic. Both the outstanding economic performance of Southeast Asian economies and their ability to master adjustment challenges had led most observers of these economies to the conclusion that "Asia is different". In comparison with previous currency crises, the macroeconomic fundamentals (GDP growth, inflation, fiscal deficit, external indebtedness, domestic savings, export performance) in the Southeast Asian economies seemed to be consistent with the fixed or quasi-fixed exchange rate regimes. Even large current account deficits were not classified as "high risk" although the vulnerability of Southeast Asian countries had increased during the last decade due to a surge in capital inflows, a construction boom, the appreciation of the US dollar, and the liberalization of domestic financial markets without strict enforcement of prudential standards. Earl...

1999

Is it possible to devise a functioning early warning system for currency crises, and is there a role for the analysis of indicators beyond economic fundamentals? In light of the East Asian crisis, the issue is examined both theoretically and empirically. An analytical framework to detect macroeconomic and structural vulnerability as well as changes in the perception of fundamentals is developed, and a range of leading indicators explored. An exemplary early warning system which includes investors' sentiments is applied retrospectively in case studies of the crises in Indonesia and Thailand in 1997, Mexico 1994 and three other Latin American episodes. The paper argues that the monitoring of market sentiments has a place along with the analysis of economic fundamentals, structural and political factors. Particularly in the recent East Asian experience, a sudden and dramatic change in the perception of economic fundamentals and expectations regarding future developments was the dri...

International Journal of Economics and Financial Issues, 2018

This study addresses an Early Warning System (EWS) of currency crisis, as well as proposes EWS with an approach of early detection of vulnerability to crisis. Detecting vulnerabilities is a more effective step because it gives the policymakers plenty of time before determining the right policy responses to anticipate and prevent a crisis. The data used are monthly macroeconomic data from January 2002 to December 2012. The steps taken were to identify currency crises, determine indicators of currency crises, determine vulnerability indicators to currency crises with logistic regression, and build vulnerability index to currency crises with fuzzy logic. This research builds vulnerability index to currency crisis with vulnerability level consisting of normal, alert, standby, and crisis suspected condition. This research provides EWS with the approach of early detection of vulnerability to currency crisis and builds vulnerability index that can be used in assessing and monitoring econom...

SSRN Electronic Journal, 2000

2004

26 Federal Reserve Bank of Atlanta ECONOMICREVIEW First Quarter 2004 and smooths out noise inherent in monthly data. This smoothing reduces the likelihood of signaling false turning points, which can be a significant problem in the monthly frequency. Second, in contrast to composite indicators that are constructed as weighted averages of statistical transformations of their components, the dynamic factor model takes into account cross-correlations and potential long-term relationships among the variables.

Routledge studies in the modern world economy, 2001

RePEc: Research Papers in Economics, 2005

Indicators of financial crisis generally do not have a good track record. This paper presents an early warning system (EWS) for six countries in Asia in which indicators do work. We extract a full list of currency crisis indicators from the literature, apply factor analysis to combine the indicators, and use these factors as explanatory variables in logit models which are estimated for the period 1970:01-2001:12. The quality of the EWS is assessed both in-sample and out-of-sample. We find that money growth (M1 and M2), national savings, and import growth correlate with currency crises.