Predicting currency crises: The indicators approach and an alternative

In recent years, a number of researchers have claimed success in systematically predicting which countries are more likely to suffer currency crises, most notably Kaminsky, Lizondo and Reinhart (1998). This paper evaluates the KLR approach to anticipating currency crises and develops and tests an alternative. First, we try to answer the question: if we had been using the KLR model in late 1996, how well armed would we have been to predict the Asia crisis? Second, we analyze a more general probit-based model of predicting currency crises. In the process, we test several basic assumptions underlying the indicators approach. (C) 1999 Elsevier Science Ltd. All rights reserved. JEL classification: F31, F47.