EARLY WARNING SYSTEM (EWS) MODEL FOR CURRENCY CRISIS: A CASE OF EAST ASIAN ECONOMIES

Abstract

The purpose of this study is to develop an Early Warning System (EWS) model to predict a currency crisis in East Asia. The study period extends from 1994 to 2013 in six East Asian countries. In this study, two methods i.e. signal approach as nonparametric model and Logit-Probit as parametric model are used to estimate a currency crisis. It is found that the performance of non-parametric model is adequate to predict the Asian crisis in 1997-1998. Out of 25 macroeconomic indicators observed, 20 indicators are proven to be sensitive to crisis. Meanwhile, during the 2008 global crisis, the non-parametric model’s performance is adequate to predict the crisis in five out of six countries samples. Signal as early warning crisis was issued between 16-21 months prior to the Asian crisis 1997 and 6-9 months prior to the global crisis in 2008. In the parametric EWS model, 11 indicators on logit model and 10 indicators on probit model have correct signs and significant statistics. The empirical result from both EWS model suggests that five macroeconomic indicators namely real effective exchange rate, short-term external debt to reserves, foreign reserves in month of imports, US real interest rate and US growth rate are highly sensitive to the currency crisis in East Asia.