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Finding a needle in a haystack: Do Early Warning Systems for Sudden Stops work?

Abstract : The paper develops an Early Warning System (EWS) to identify the build up of vulnerabilities in the external sector of 31 Emerging Markets (EMs) across the period 1995-2017 and avoid the painful sudden reversal of capital flows associated to them. It contributes to the literature on the prediction of financial discontinuities in three ways. First, it uses a discrete choice model to calculate and compare the marginal effect of different domestic and global factors on the probability of a sudden stop materializing. Second, it analyzes the performance of the model with a recursive framework that reflects accurately the information set available to policymakers at the time of the prediction. Third, it investigates the relationship between ex-ante probability of a sudden stop and the ensuing output loss. We find that domestic and global factors contribute to the reversal of capital flows in a comparable way. Our model calls half of the pre-crisis periods, exhibiting a high specificity and a proper timing. Moreover, we find a positive link between the ex-ante probability of a sudden stop and the associated ex-post loss. These results call for an active use of Early Warnings in the policy-making sphere.
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https://halshs.archives-ouvertes.fr/halshs-03185520
Contributor : Caroline Bauer <>
Submitted on : Tuesday, March 30, 2021 - 1:39:39 PM
Last modification on : Thursday, April 1, 2021 - 10:24:52 AM

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  • HAL Id : halshs-03185520, version 1

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Umberto Collodel. Finding a needle in a haystack: Do Early Warning Systems for Sudden Stops work?. 2021. ⟨halshs-03185520⟩

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