Early warning systems of financial crises: implementation of a currency crisis model for Uganda

The objective of this paper is to implement a prototype of a currency crisis model as part of an early warning system framework for Uganda. The financial systems of developing countries like Uganda are especially vulnerable and therefore robust instruments to predict crises are needed. Our model is based on the signals approach developed by Kaminsky, Lizondo and Reinhart (1998) and Kaminsky and Reinhart (1999). The basic idea of the signals approach is to monitor several indicators that tend to exhibit an unusual behaviour in the periods preceding a crisis. When an indicator crosses a threshold, then it is said to issue a signal that a currency crisis may occur within a given period. We implemented this signals approach for Uganda. One of the main challenges in this connection is that Uganda during the analyzed periods had no currency crisis. Therefore, we modified the model in a way that it estimates some of the performance measures based on empirical studies to obtain usable results. The outcomes of our calculations performed well and were economically validated.

[1]  Philip H. Dybvig,et al.  Bank Runs, Deposit Insurance, and Liquidity , 1983, Journal of Political Economy.

[2]  Thomas Heidorn,et al.  Gründung einer deutschen Strombörse für Elektrizitätsderivate , 1999 .

[3]  Andrew Berg,et al.  Anticipating Balance of Payments Crises--The Role of Early Warning Systems; The Role of Early Warning Systems , 2000 .

[4]  Heinz Cremers,et al.  Beta als Risikoma: eine Untersuchung am europischen Aktienmarkt , 2000 .

[5]  Thomas Heidorn,et al.  Eine empirische Analyse der Spreadunterschiede von Festsatzanleihen zu Floatern im Euroraum und deren Zusammenhang zum Preis eines Credit Default Swaps , 2002 .

[6]  Andrew Berg,et al.  Assessing Early Warning Systems , 2004 .

[7]  I. Goldfajn,et al.  Balance of Payments and Capital Flows: The Role of Liquidity , 1996 .

[8]  David Greenaway,et al.  Long-Run Trends in the Relative Price of Primary Commodities and in the Terms of Trade of Developing Countries , 1993 .

[9]  Carmen M. Reinhart,et al.  The Twin Crises: The Causes of Banking and Balance-of-Payments Problems , 1996 .

[10]  Gareth Loy,et al.  A critical overview , 1985 .

[11]  Andrés Velasco,et al.  Financial Crises in Emerging Markets: The Lessons from 1995 , 1996 .

[12]  N. Stern.  The Economics of Development: A Survey , 1989 .

[13]  Carmen M. Reinhart,et al.  Leading Indicators of Currency Crises , 1997, SSRN Electronic Journal.

[14]  Helmut Lütkepohl,et al.  Towards a new early warning system of financial crises , 2002 .

[15]  Roberto A. Perrelli,et al.  The Role of Corporate, Legal and Macroeconomic Balance Sheet Indicators in Crisis Detection and Prevention , 2002, SSRN Electronic Journal.

[16]  Charles W. Calomiris,et al.  The Origins of Banking Panics: Models, Facts, and Bank Regulation , 1991 .

[17]  Horst Löchel.  Die ökonomischen Dimensionen der New Economy , 2000 .

[18]  G. Kaminsky,et al.  Varieties of Currency Crises , 2003 .

[19]  A. Binder,et al.  Aktuelle Fragen des Bank- und Kapitalmarktrechts I: Non-Performing-Loans/Faule Kredite - Handel, Work-Out, Outsourcing und Securitisation , 2004 .

[20]  Gary B. Gorton.  Banking panics and business cycles , 1988 .

[21]  Hali J. Edison.  Do Indicators of Financial Crises Work? An Evaluation of an Early Warning System , 2000 .

[22]  Angus Deaton,et al.  Journal of Economic Perspectives-Volume 13, Number 3-Summer 1999-Pages 23-40 Conmmodity Prices and Growth in Africa , 2022 .

[23]  Horst Löchel,et al.  Die Auswirkungen des Übergangs zum Kapitaldeckungsverfahren in der Rentenversicherung auf die Kapitalmärkte , 2001 .

[24]  Chikako Oka.  Anticipating Arrears to the IMF: Early Warning Systems , 2003 .

[25]  Jan Willem Gunning,et al.  Explaining African Economic Performance , 1999 .

[26]  G. Kaminsky,et al.  Currency and Banking Crises; The Early Warnings of Distress , 1999 .

[27]  Marja Elsinga,et al.  The role of corporations , 2004 .

[28]  Robert P. Flood,et al.  Collapsing exchange-rate regimes: Some linear examples , 1984 .

[29]  J. Bibangambah.  Africa's quest for economic development Uganda's experience , 2001 .

[30]  B. Bhattacharyay.  Towards a Macro-Prudential Leading Indicators Framework for Monitoring Financial Vulnerability , 2003, SSRN Electronic Journal.

[31]  M. Bussière,et al.  Towards a new early warning system of financial crises , 2002 .

[32]  P. Collier,et al.  Uganda's Recovery: The Role of Farms, Firms, and Government , 2001 .

[33]  R. Mckinnon,et al.  Credible Liberalizations and International Capital Flows: The "Overborrowing Syndrome" , 1996 .

[34]  Guy Laroque,et al.  A model of commodity prices after Sir Arthur Lewis , 2003 .

[35]  Paul Krugman,et al.  A Model of Balance-of-Payments Crises , 1979 .

[36]  A. Abiad,et al.  Early-Warning Systems: A Survey and a Regime-Switching Approach , 2003, SSRN Electronic Journal.

[37]  Andrew K. Rose,et al.  Exchange market mayhem: the antecedents and aftermath of speculative attacks , 1995 .

[38]  Jürgen Moormann,et al.  Strategic positioning of e-commerce business models in the portfolio of corporate banking , 2002, Proceedings of the 35th Annual Hawaii International Conference on System Sciences.

[39]  M. Obstfeld.  Rational and Self-Fulfilling Balance-of-Payments Crises , 1984 .

[40]  International Macroeconomics and Finance: Theory and Econometric Methods , 2001 .

[41]  Francis X. Diebold,et al.  Scoring the Leading Indicators , 2020, Business Cycles.