Misleading Indicators? The Argentinean Currency Crisis

Abstract

Despite the fact that Argentina has been suffering from recession for years, the timing and severity of the recent currency crisis surprised most observers. There is an extensive literature on early warning systems, which claim to be apt for a systematical prediction of currency crises. One of the most prominent "early warning system" approaches was first developed by Kaminsky, Lizondo, and Reinhart (KLR) [Leading Indicators of Currency Crises, International Monetary Fund Staff Papers No. 45, 1998, pp. 1-48]. This paper analyzes whether the KLR approach could have predicted the Argentinean currency crisis at an earlier point in time. Using a broad set of indicators, it is shown that the forecasting quality of this approach is poor in the case of Argentina.