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Journal of Economic Integration 2009 March;24(1) :87-115.
A Forewarning Indicator System for Financial Crises: the Case of Six Central and Eastern European Countries
Irène Andreou
Gilles Dufrénot
Alain Sand-Zantman and 
Aleksandra Zdzienicka-Durand 
GATE(CNRS, Université Lyon 2)
Université Paris 12, GREQAM
OFCE (FNSP), GATE (CNRS, Université Lyon 2, ENS-LSH)
Copyright ©2009 Journal of Economic Integration

We propose a measure of the probability of crises associated with an aggregate indicator, where the percentage of false alarms and the proportion of missed signals can be combined to give an appreciation of the vulnerability of an economy. In this perspective, the important issue is not only to determine whether a system produces true predictions of a crisis, but also whether there are forewarning signs of a forthcoming crisis prior to its actual occurrence. To this end, we adopt the approach initiated by Kaminsky, Lizondo and Reinhart (1998), analyzing each indicator and calculating each threshold separately. We depart from this approach in that each country is also analyzed separately, permitting the creation of a more "custom-made" early warning system for each one. These indicators could help to achieve a guideline, strengthening the domestic capacities to face economic integration and financial stresses.

JEL Classification: F31, F47

Keywords: currency crisis | early warning system | composite indicator | Eastern Europe
1. Abiad, A. (2003), "Early-warning Systems: a Survey and a Regime-switching Approach", IMF Working Paper 03/32.
2. Arias, G. and U.G. Erlandsson (2004), "Regime Switching as an Alternative Early Warning System of Currency Crises. An Application to South-East Asia", Working Paper, Lund University, Sweden.
3. Berg, A. and C. Patillo (1999), "Are Currency Crises Predictable? A test", IMF Staff Papers 46(2), pp. 107-138.
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