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| Author: | Osband, K. Rijckeghem, C. van |
| Title: | Safety from Currency Crashes |
| Journal: | IMF Staff Papers
2000 : VOL. 47:2, p. 238-258 |
| Index terms: | SAFETY CURRENCY FINANCE |
| Language: | eng |
| Abstract: | As part of a proposed two-stage early warning system, the authors estimate "safety zones" for fundamentals under which currency crashes are unlikely to occur. The authors depart from traditional regression-based early warning systems and instead estimate the set of fundamentals for which currency crises never occurred and label this environment "safe or near-safe." For a sample of emerging markets from 1985 through 1998, the authors are able to classify 47 percent of the observed tranquil environments as safe or near-safe on a 12-month horizon, based on criteria in which external debt and reserves feature heavily. Nonparametric tests indicate that environments the authors identified as safe or near-safe bear less than a 1 percent risk of a currency crash. The results also pass a number of out-of-sample tests. |
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