EFFECTIVENESS OF EARLY WARNING MODELS: A CRITICAL REVIEW AND NEW AGENDA FOR FUTURE DIRECTION

Rakesh Padhan () and K. P. Prabheesh ()
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Rakesh Padhan: India
K. P. Prabheesh: Indian Institute of Technology

Bulletin of Monetary Economics and Banking, 2019, vol. 22, issue 4, 457-484

Abstract: This paper suggests a new agenda for constructing early warning models (EWMs) to enhance their effectiveness in predicting financial crises. The central argument of the new agenda aims to eradicate the weaknesses of existing EWMs, since their failure to predict the global financial crisis of 2007–2008 demonstrates the need to improve their efficiency. We document the history of EWMs and propose a new agenda as follows: 1) the accurate measurement of a financial crisis, 2) implementation of a fourthgeneration crisis model to capture the dynamic nature of the financial crisis, and 3) the inclusion of interconnectedness/contagion variables as explanatory variables for the financial crisis.

Keywords: Early Warning Models; Financial Crisis; Contagion; Global Financial Crisis; Crisis Generation Models (search for similar items in EconPapers)
JEL-codes: C00 F60 G01 G18 G21 H12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:22:y:2019:i:4d:p:457-484

DOI: 10.21098/bemp.v22i4.1188

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