Assessing Financial Vulnerability : An Early Warning System for Emerging Markets

Ever since the ERM crises of 1992-93 and the Mexican crisis of 1994-95, there has been a heightened interest in early-warning signals of financial crises. This study reviews the literature on the origins of currency and banking crises. It then presents a comprehensive battery of empirical tests on the performance of alternative early-warning indicators for emerging-market economies. The study identifies crisis-threshold values for early-warning indicators that differ both by country and by indicator. This allows the authors to make historical comparisons among banking or currency crises, as well as to draw conclusions about which specific indicators have, over time, sent the most reliable early-warning signals of future currency or banking crises in emerging markets.