Predicting Currency Crises - possible or impossible?

Sammanfattning: This paper is an assessment of the possibility to predict currency crises. Different methods are explored. A discrete-choice model is estimated with an underlying intuition that is far more simple than traditional estimations of this kind. The results suggest that currency crises are complex phenomenas that cannot be predicted by just using a few variables. I then turn to a descriptive analysis, that first focuses on macroeconomic fundamentals and then on domestic troubles in the banking sectors of crisis-struck countries. Finally some possible contributing factors lying outside the control of crisis countries are discussed. The final conclusion is that the exact timing of a currency crisis cannot be predicted, but that vulnerability – that is a high probablity that a crisis can occur – can be detected. Further research on what finally triggers a crisis in a vulnerable situation is therefore needed.