Abstract
The purpose of this paper is to develop an econometric model of early warning system (EWS) for predicting currency crises in EU candidate countries. Using actual quarterly panel data for three EU candidate countries (Croatia, Macedonia and Turkey) in the period January 2005 - June 2010, we estimate a binomial logit model, which accurately predicts potential episodes of outbreak of currency crisis. In addition, we find that real GDP growth rate, participation in an IMF loan program, current account and fiscal balance and short-term external indebtedness are the most significant common predictors of currency crises across EU candidate countries. These results imply implementing policy measures aimed at raising the growth potential of the domestic economies of EU candidate countries, monitoring their short-term external indebtedness, improving their external competitiveness, cutting public spending and increasing the confidence of residents and non-residents in their domestic banking sectors.
Highlights
The purpose of this paper is to develop an econometric model of early warning system (EWS) for explaining and forecasting currency crises across EU candidate countries and to help policymakers predict currency crashes at an earlier stage and take steps to prevent their occurrence
We estimate and specify a binomial logit model using actual quarterly data on a large set of different indicators of currency crises including macroeconomic and financial variables, indicators linked to current account and capital flows as well as political and institutional factors for a panel of three EU candidate countries (Croatia, Macedonia and Turkey) over a five-year period of time (January 2005 - June 2010)
Our findings endorse the general conclusion that a logit model of EWS can correctly predict the occurrence of currency crises across EU candidate countries
Summary
Summary: The purpose of this paper is to develop an econometric model of early warning system (EWS) for predicting currency crises in EU candidate countries. The purpose of this paper is to develop an econometric model of EWS for explaining and forecasting currency crises across EU candidate countries and to help policymakers predict currency crashes at an earlier stage and take steps to prevent their occurrence
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