港大英文课件Leadingindicatorsofcurrencycrises.pptVIP

Leading indicators of currency crises WONG Ka Fu 22 March 2000 Definition of a currency crisis 1. a “large” currency depreciation takes place Problem: this definition excludes situations where a currency was under substantial pressure but the authorities managed a successful defense by, among other measures, raising interest rates and/or intervening in the foreign exchange market. Definition of a currency crisis 2. As a result of (1) above, most researchers define currency crises by using indices that weight changes in the exchange rate, foreign exchange reserves and (if available) short-term interest rates Problem: The construction of these indices as well as the thresholds used for identifying crises differ across researchers. Even this definition may not completely capture crisis situations because in several instances, the authorities have responded to exchange market pressures by introducing capital controls. Empirical methodology (identifying leading indicators) Identify leading indicators by comparing the behavior of a variable prior to crises with its behavior in tranquil periods. Depreciation(t+1,t) = …. + leading indicator(t) + ... A variable is a useful leading indicator if it displays anomalous behavior prior to crises while not providing false signals of an impending crisis in normal or tranquil times. Empirical methodology (identifying leading indicators) Advantage: Such “univariate” event analyses are easy to implement and do not impose much a priori structure on the data. When multiple indicators are available one has to address the question of combining them for predicting the possibility of a crisis. Often we will have Depreciation(t+1,t) = …. + indicator1(t) + indicator2(t) + indicator3(t) ... Empirical methodology (probability estimate) directly estimate the probability of a currency or banking crisis (using limited-dependent variable models) and identify the variables that statistically aid in predicting crises (see Frankel and Rose,