Theoretical and Applied Economics
No. 1 / 2015 (602), Spring
Predicting balance of payments crises for some emerging economies
University of Hyderabad, Hyderabad, India
Bandi KAMAIAH
University of Hyderabad, Hyderabad, India
Abstract. The study aims at developing an Early Warning System for predicting balance of payments crises for 17 emerging economies, which constitute a relatively homogenous group, over the period 1975-2012. We construct an index of exchange market pressure, based on monthly depreciations of the nominal exchange rate and declines in reserves, to identify crisis episodes. To construct the index we propose a new weighting scheme using principal components analysis, as an improvement over the conventionally used precisionweighting scheme. Probit regressions are used to identify key macroeconomic indicator variables that can predict the onset of a crisis. These include the ratio of M2 to reserves, short-term debt to reserves, export growth, ratio of total reserves to external debt, change in reserves, openness and overvaluation of the real exchange rate. From alternative specifications, we identify the best model based on various accuracy measures. We use criteria such as area under the Receiver Operating Characteristic, Quadratic Probability Score, Pseudo R2 and Kuiper’s Score to evaluate model performance. Empirical results show the warning system exhibits a high degree of accuracy and performs well. The variables identified show significant ability to signal vulnerability of the external sector of the economy. Policymakers can use the early warning system as the core of a larger set of variables on their radar to take pre-emptive measures to avoid crises or dampen their effects.
Contents
The credit impact on the economic growth
Predicting balance of payments crises for some emerging economies
Creativity and innovation – Sources of competitive advantage in the value chain of tourism enterprises
How to escape the middle income trap: international evidence from a binary dependent variable model
Land value dynamics with endogenous human and physical capital accumulation
Environmental Kuznets curve. Evidence from Romania
Effects of economic crisis on the distribution of earnings from Romania
An approach of social policy in terms of macro-stabilisation function
Economy recovery risks which Romanian companies has to cope with
The measurement of fiscal behavior in some European countries: Panel data perspective
Romanian municipal bond market at Bucharest Stock Exchange: further investigations
Inequality and economic growth: theoretical and operational approach
Measuring financial development in India: A PCA approach
Welfare costs due to economic fluctuations according to different model setups
The role of rating agencies in international financial market
Socioeconomic development index ranking calculations of cities with fuzzy clustering method: case of Turkey
Fiscal transparency in the European Union
Epistemic transfers in economics from social sciences
Accelerating the development of learning organizations: Shifting paradigms from current practice to human performance improvement
Transferring business intelligence and big data analysis from corporations to governments as a hybrid leading indicator
The impact of cultural and educational accumulations on entrepreneurial behaviour. Main issues encountered in theoretical approaches
Models for evaluating financial crisis – what went wrong for developed and emerging economies?
Impact of financial crisis on the decision making process for insurance consumers
Beyond the implementation of a dynamic stochastic general equilibrium model
How the legislation influenced the M&A transactions in Romania