An early warning system for currency crises

This thesis tests an early warning system that can forecast currency crises. It then compares the performance of the early warning system with data from the three regions of Asia, Europe, and Latin America. The signaling method was developed by Kaminsky, Lizondo, and Reinhart (1998) and Kaminsky and Reinhart (1999). This early warning system for currency crises is based on the idea that some indicators (explanatory variables) tend to display abnormal movements, the “signals”, prior to a currency crisis. An indicator is said to send a "signal" that a currency crisis may happen whenever it falls below (or exceeds) its threshold. The empirical results show that the signaling method is able to predict currency crises in four Asian economies, two European economies, and six Latin American economies, thus suggesting that an early warning system may be useful for the basic diagnosis of a currency crisis. Keywords: Early Warning System, Currency Crises, Signaling Method, Asia, Europe, Latin Americ