Early Warning System

The Early Warning System was originally developed by Kaminsky, Lizondo and Reinhart (KLR) in 1998. Their system was based on a signal approach. In this approach the system monitors unusual behaviors of indicators preceding a crisis. However, a senior economist in the division of International Finance identified weaknesses in the original Early Warning System. Hali J. Edison saw the need to evaluate and improve upon the econometric model that was used to anticipate financial crises specifically in markets of emerging countries. In the system Edison developed, it showed that months before the Asian financial crisis, the Asian countries already exhibited signs of vulnerability. This result then suggests that an early warning system may be used as a tool for identifying variables that may lead to a crisis.
What is an early warning system? An early warning system consists of a mechanism for predicting crisis. …