An "almost-too-late" warning mechanism for currency crises

Abstract

We propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants.Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month.We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998. Keywords: Currency crisis, term structure of interest rates, transition economies. JEL classi.cation: F31, F34, E43.