Currency and banking crises - the early warning of distress

The abruptness and virulence of the 1997 Asian crises have led many to claim that these crises are of a new breed and thus they were unforecastable. This paper examines 102 financial crises in 20 countries and concludes that the Asian crises are not of a new variety. Overall, the 1997 Asian crises, as well as previous crises in other regions, occur when the economies are in distress, making the degree of fragility of the economy a useful indicator of future crises. Based on this idea, the paper proposes different composite leading indicators of crises, which are evaluated in terms of accuracy both in-sample and out-of-sample. I have benefited from insightful discussions with Carmen Reinhart and Saul Lizondo on this topic and expert econometric advise by Francis Diebold. I also thank Ilan Goldfajn for the data base on capital account restrictions, Kristopher Dickson and Ian Anderson for superb research assistance, and seminar participants at Arizona Stat