Early Warning System: An Assessment of Vulnerability

Predicting the timing of currency and banking crises is likely to remain an elusive task for academics, financial market participants, and policymakers. Few foresaw the Asian crises and fewer still could have imagined their severity. However, recent events have highlighted the importance of improving upon a system of “early warnings.” The signals approach introduced in Kaminsky and Reinhart (1996) and applied to the out-of-sample data during January 1996- June 1997 in this section we illustrate how this approach can ne applied to glean where trouble spots may be brewing