The purpose of this paper is to develop an econometric model of early warning
system (EWS) for predicting currency crises in EU candidate countries. Using
actual quarterly panel data for three EU candidate countries (Croatia,
Macedonia and Turkey) in the period January 2005 - June 2010, we estimate a
binomial logit model, which accurately predicts potential episodes of
outbreak of currency crisis. In addition, we find that real GDP growth rate,
participation in an IMF loan program, current account and fiscal balance and
short-term external indebtedness are the most significant common predictors
of currency crises across EU candidate countries. These results imply
implementing policy measures aimed at raising the growth potential of the
domestic economies of EU candidate countries, monitoring their short-term
external indebtedness, improving their external competitiveness, cutting
public spending and increasing the confidence of residents and non-residents
in their domestic banking sectors.
An optimal early warning system for currency crises under model uncertainty
