Currency and Banking Crises: The Early Warnings of Distress

The abruptness and virulence of the 1997 Asian crises have led many to claim that these crises are of a new breed and thus they were unforecastable. This paper examines 102 financial crises in 20 countries and concludes that the Asian crises are not of a new variety. Overall, the 1997 Asian crises, as well as previous crises in other regions, occur when the economies are in distress, making the degree of fragility of the economy a useful indicator of future crises. Based on this idea, the paper proposes different composite leading indicators of crises, which are evaluated in terms of accuracy both insample and out-of-sample. I have benefited from insightful discussions with Carmen Reinhart and Saul Lizondo on this topic and expert econometric advise by Francis Diebold. I also thank Ilan Goldfajn for the data base on capital account restrictions, Kristopher Dickson and Ian Anderson for superb research assistance, and seminar participants at Arizona State University, the Federal Reserve Board, Emory University, Georgetown University, George Washington University, the InterAmerican Development Bank, the International Monetary Fund, University of Pennsylvania, and the World Bank for very helpful comments.