A panel data econometric approach to Real Exchange Rate (RER) as a signaling early warning indicator of currency crisis in ASEAN Region

In light of the significant costs associated with a financial crisis that affects multiple countries through economic integration, various empirical studies have attempted to determine the primary variables that drives one. Hence, the development of early warning indicators have been of great significance for international financial institutions. Based from Lestano, Jacobs and Kuper (2003), empirical studies have applied the signal-based approach and the logit-probit model in constructing an early warning system (EWS) which uses domestic and external macroeconomic indicators in determining the likelihood of a currency crisis. The said methodologies also have provided insight on the leading indicators such as the real effective exchange rate (Kaminsky, Reinhart and Lizondo, 1998; Berg and Patillo, 1999) which proves to be have the highest significance before and during a currency crisis occurrence. This study aims to develop a model for the ASEAN region which uses Real Exchange Rate as primary indicator of a possible currency crisis having exploratory macroeconomic indicators as independent variables. Identifying the significant independent variables of the model may provide useful insights to policy makers and various financial institutions within the region to further mitigate the possibility of a crisis. Indeed, prevention and risk mitigation is better than recovery