Predicting balance of payments crises for some emerging economies
The study aims at developing an Early Warning System for predicting balance of payments crises for 17 emerging economies, which constitute a relatively homogenous group, over the period 1975-2012. We construct an index of exchange market pressure, based on monthly depreciations of the nominal exchan...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
General Association of Economists from Romania
2015-03-01
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| Series: | Theoretical and Applied Economics |
| Subjects: | |
| Online Access: |
http://store.ectap.ro/articole/1054.pdf
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| Summary: | The study aims at developing an Early Warning System for predicting balance of
payments crises for 17 emerging economies, which constitute a relatively homogenous
group, over the period 1975-2012. We construct an index of exchange market pressure,
based on monthly depreciations of the nominal exchange rate and declines in reserves, to
identify crisis episodes. To construct the index we propose a new weighting scheme using
principal components analysis, as an improvement over the conventionally used precisionweighting
scheme. Probit regressions are used to identify key macroeconomic indicator
variables that can predict the onset of a crisis. These include the ratio of M2 to reserves,
short-term debt to reserves, export growth, ratio of total reserves to external debt, change
in reserves, openness and overvaluation of the real exchange rate. From alternative
specifications, we identify the best model based on various accuracy measures. We use
criteria such as area under the Receiver Operating Characteristic, Quadratic Probability
Score, Pseudo R2 and Kuiper’s Score to evaluate model performance. Empirical results
show the warning system exhibits a high degree of accuracy and performs well. The
variables identified show significant ability to signal vulnerability of the external sector of
the economy. Policymakers can use the early warning system as the core of a larger set of
variables on their radar to take pre-emptive measures to avoid crises or dampen their
effects. |
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| ISSN: | 1841-8678 1844-0029 |