EFFECTIVENESS OF EARLY WARNING MODELS: A CRITICAL REVIEW AND NEW AGENDA FOR FUTURE DIRECTION

  • Rakesh Padhan Ph.D. Scholar
  • K. P. Prabheesh Associate Professor, Indian Institute of Technology, Hyderabad, India
Keywords: Early warning models, Financial crisis, Contagion, Global financial crisis, Crisis generation models

Abstract

This paper suggests a new agenda for constructing early warning models (EWMs) toenhance their effectiveness in predicting financial crises. The central argument of thenew agenda aims to eradicate the weaknesses of existing EWMs, since their failure topredict the global financial crisis of 2007–2008 demonstrates the need to improve theirefficiency. We document the history of EWMs and propose a new agenda as follows:1) the accurate measurement of a financial crisis, 2) implementation of a fourthgenerationcrisis model to capture the dynamic nature of the financial crisis, and 3) theinclusion of interconnectedness/contagion variables as explanatory variables for thefinancial crisis.

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Published
2019-12-01
How to Cite
Padhan, R., & Prabheesh, K. P. (2019). EFFECTIVENESS OF EARLY WARNING MODELS: A CRITICAL REVIEW AND NEW AGENDA FOR FUTURE DIRECTION. Buletin Ekonomi Moneter Dan Perbankan, 22(4), 457 - 484. https://doi.org/10.21098/bemp.v22i4.1188
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