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Comparing Parametric and Non‐parametric Early Warning Systems for Currency Crises in Emerging Market Economies
Author(s) -
Comelli Fabio
Publication year - 2014
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12121
Subject(s) - currency , parametric statistics , sample (material) , economics , emerging markets , currency crisis , warning system , monetary economics , econometrics , macroeconomics , computer science , telecommunications , statistics , chemistry , mathematics , chromatography
This paper compares in‐sample and out‐of‐sample performances of parametric and non‐parametric early warning systems ( EWS ) for currency crises in emerging economies. The parametric EWS achieves superior out‐of‐sample results compared with the non‐parametric EWS . The policymaker faces a trade‐off when using EWS : greater cautiousness allows the policymaker to correctly call more crisis episodes, but this comes at the cost of issuing more false alarms. The benefit of correctly calling more currency crises needs to be traded off against the cost of issuing more false alarms and of implementing corrective policies prematurely.