In This Review

Assessing Financial Vulnerability: An Early Warning System for Emerging Markets
Assessing Financial Vulnerability: An Early Warning System for Emerging Markets
By Morris Goldstein, Graciela L. Kaminsky, and Carmen M. Reinha
Institute for International Economics, 2000, 150 pp
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The Asian financial crises of 1997 occurred in countries with previously exemplary economic performances, catching many analysts, investors, and officials off guard. That surprise prompted extensive work on possible "early warning" indicators for currency and banking crises. This short, thoughtful book represents the latest and most comprehensive treatment of the subject, summarizing earlier efforts as well as making its own important contribution. The results are mixed. With an appropriate set of indicators, the authors find, ample warning of currency crises is usually possible at least 12 months in advance. Banking crises are somewhat more difficult to predict, perhaps partly because their beginnings are more difficult to date. But any warning system also produces "false positives," or warnings of crises that do not occur. And most early-warning indicators missed the Indonesian currency crisis altogether. In short, analysts are not able to forecast the future accurately-even in retrospect. But the findings presented here are a useful addition to the information available to investor and policymaker alike.