| Preface | ix |
| Acknowledgments | xv |
| 1 | Introduction | 1 |
| Organization of the book | 9 |
| 2 | Methodology | 11 |
| General Guidelines | 11 |
| Putting the Signals Approach to Work | 18 |
| 3 | Empirical Results | 33 |
| The Monthly Indicators: Robustness Check | 33 |
| The Annual Indicators: What Works? | 38 |
| Do the Indicators Flash Early Enough? | 40 |
| Microeconomic Indicators: Selective Evidence | 42 |
| 4 | Rating the Rating Agencies | 45 |
| Do Sovereign Credit Ratings Predict Crises? | 45 |
| Why Do Credit Ratings Fail to Anticipate Crises? | 49 |
| Do Financial Markets Anticipate Crises? | 52 |
| 5 | An Assessment of Vulnerability: Out-of-Sample Results | 55 |
| Vulnerability and Signals | 56 |
| A Composite Indicator and Crises Probabilities | 64 |
| 6 | Contagion | 73 |
| Defining Contagion | 74 |
| Theories of Contagion and Their Implications | 75 |
| Empirical Studies | 76 |
| Trade and Financial Clusters and a Composite Contagion Index | 77 |
| What the Index Reveals about Three Recent Crisis Episodes | 79 |
| 7 | The Aftermath of Crises | 85 |
| The Recovery Process | 85 |
| Some Caveats | 89 |
| 8 | Summary of Results and Concluding Remarks | 95 |
| Summary of Findings | 95 |
| Would the Publication of the Indicators Erode Their Early Warning Role? | 109 |
| Do the Better Performing Indicators Carry Policy Implications? | 110 |
| Appendix A | Data and Definitions | 111 |
| References | 115 |
| Index | 121 |
| Tables | |
| Table 1.1 | Emerging Asia: real GDP growth forecasts, 1996-98 | 3 |
| Table 1.2 | Rating agencies' performance before the Asian crisis: Moody's and Standard & Poor's long-term debt ratings, 1996-97 | 4 |
| Table 2.1 | Currency crisis starting dates | 22 |
| Table 2.2 | Banking crisis starting dates | 24 |
| Table 2.3 | Selected leading indicators of banking and currency crises | 26 |
| Table 2.4 | Optimal thresholds | 29 |
| Table 2.5 | Examples of country-specific thresholds: currency crises | 30 |
| Table 3.1 | Ranking the monthly indicators: banking crises | 34 |
| Table 3.2 | Ranking the monthly indicators: currency crises | 35 |
| Table 3.3 | Annual indicators: banking crises | 38 |
| Table 3.4 | Annual indicators: currency crises | 39 |
| Table 3.5 | Short-term debt: selected countries, June 1997 | 40 |
| Table 3.6 | How leading are the signals? | 41 |
| Table 3.7 | Microeconomic indicators: banking crises | 42 |
| Table 4.1 | Comparison of Institutional Investor sovereign ratings with indicators of economic fundamentals | 46 |
| Table 4.2 | Do ratings predict banking crises? | 48 |
| Table 4.3 | Do ratings predict currency crises? | 48 |
| Table 4.4 | Do ratings predict banking crises for emerging markets? | 50 |
| Table 4.5 | Do ratings predict currency crises for emerging markets? | 50 |
| Table 4.6 | Rating agencies' actions on the eve and aftermath of the Asian crisis, June-December 1997 | 51 |
| Table 4.7 | Do financial crises help predict credit rating downgrades? (Institutional Investor) | 52 |
| Table 4.8 | Do financial crises predict credit rating downgrades? (Moody's) | 52 |
| Table 5.1 | Signals of currency crises, June 1996-June 1997 | 57 |
| Table 5.2 | Borderline signals of currency crises, June 1996-June 1997 | 59 |
| Table 5.3 | Signals of banking crises, June 1996-June 1997 | 60 |
| Table 5.4 | Borderline signals of banking crises, June 1996-June 1997 | 61 |
| Table 5.5 | Weighting the signals for currency and banking crises in emerging markets, June 1996-June 1997 | 62 |
| Table 5.6 | Vulnerability to financial crises in emerging markets: alternative measures, June 1996-June 1997 | 63 |
| Table 5.7 | Composite indicator and conditional probabilities of financial crises | 66 |
| Table 5.8 | Scoring the forecasts: quadratic probability scores | 67 |
| Table 6.1 | Crises that showed few signals, 1970-97 | 74 |
| Table 6.2 | Conditional probabilities and noise-to-signal ratios for financial and trade clusters | 77 |
| Table 6.3 | Countries sharing financial and trade clusters with original crisis country or region | 80 |
| Table 6.4 | Contagion vulnerability index | 81 |
| Table 6.5 | Characteristics of affected countries in Asian and Mexican episodes | 82 |
| Table 6.6 | Asia and Latin America: added power of Thai crisis in explaining probability of contagion in bank cluster, July 1997 | 83 |
| Table 7.1 | Length of recovery from financial crises | 86 |
| Table 7.2 | Time elapsed from beginning of banking crises to their peaks | 87 |
| Table 7.3 | Comparison of inflation and growth before and after currency crises | 88 |
| Table 7.4 | The wake of devaluations: a review of the literature | 90 |
| Table 7.5 | Comparison of severity of crises by region and period, 1970-97 | 92 |
| Table 8.1 | Currency and banking crises: best performing indicators | 97 |
| Table 8.2 | Country rankings of vulnerability to currency crises for two periods | 99 |
| Table 8.3 | Country rankings of vulnerability to banking crises for two periods | 101 |
| Figures | |
| Figure 2.1 | Mexico: real exchange rate, 1970-96 | 31 |
| Figure 5.1 | Probability of currency crises for four Southeast Asian countries, 1990-97 | 69 |
