Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies

Fabio Comelli

No 2014/065, IMF Working Papers from International Monetary Fund

Abstract: We compare how logit (fixed effects) and probit early warning systems (EWS) predict insample and out-of-sample currency crises in emerging markets (EMs). We look at episodes of currency crises that took place in 29 EMs between January 1995 and December 2012. Stronger real GDP growth rates and higher net foreign assets significantly reduce the probability of experiencing a currency crisis, while high levels of credit to the private sector increase it. We find that the logit and probit EWS out-of-sample performances are broadly similar, and that the EWS performance can be very sensitive both to the size of the estimation sample, and to the crisis definition employed. For macroeconomic policy purposes, we conclude that a currency crisis definition identifying more rather than less crisis episodes should be used, even if this may lead to the risk of issuing false alarms.

Keywords: WP; currency crisis; Early warning systems; currency crises; out-of-sample performance; crisis episode; pressure index; estimation sample; Index threshold; coefficient estimate; Exchange rate indexes; Global financial crisis of 2008-2009; Global (search for similar items in EconPapers)
Pages: 26
Date: 2014-04-17
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Citations: View citations in EconPapers (17)

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