Signaling currency crises in South Africa - South African Reserve Bank

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SARB Conference 2006Figure 9: Composite index of currency crisis signalsComposite index60504030201001994/011994/071995/011995/071996/011996/071997/011997/071998/011998/071999/011999/072000/012000/072001/012001/072002/012002/072003/012003/072004/012004/072005/012005/072006/01Source: Own calculationsWhile the index itself can be used to observe changes in the intensity of currency crisis signals,the level of the index cannot be interpreted. Thus, it is not possible to draw inferences on theprobability of currency crises from the index. Therefore, following Brüggemann and Linne (2002)and Edison (2000) conditional probabilities for currency crises are calculated:P( crises CI ≤ CI < CI ) =t, t+18 l t u∑# months for CI ≤ CI < CI and crisis follows∑l t u# months for CI ≤ CI < CIl t u(8)For each interval between a lower and an upper limit (in our case intervals of 10) the conditionalprobability is calculated. This conditional probability is the probability of a crisis occurring within24 months under the condition that the indicator ranges between the lower and the upper band.The conditional probabilities are reported in Table 2.Table 2: Conditional probabilities of currency crises in South AfricaInterval 0-10 10-20 20-30 30-40 40-50 UnconditionalProbability 0,17 0,52 0,60 0,83 1 0,57Source: Own calculationsFor example, the probability of a currency crisis is 0,83 if the index shows a value of between 30and 40, which is well above the general probability of a currency crisis to occur following anymonth of the sample (0,57). Figure 10 shows a graph where the probabilities are attributed tothe respective months.Figure 10: Conditional probabilities of currency crises in South AfricaConditional probabilities10.80.60.40.201994/011994/071995/011995/071996/011996/071997/011997/071998/011998/071999/011999/072000/012000/072001/012001/072002/012002/072003/012003/072004/012004/072005/012005/072006/01Source: Own calculations. Note: Dotted line shows unconditional probability212Knedlik
SARB Conference 2006To test for the robustness of the composite indicator of currency crises, as derived by thesignals approach, the procedure is repeated for the case of an 18-month time window. Thenoise-to-signal ratios are reported in Figure 11. Notable is the change in the relevant indicators.Only six indicators sending more positive than false signals are left, while credit to GDP andbank deposits are not considered in the 18-month case.Figure 11: Noise-to-signal ratios with 18-month time windowsNoise-to-signal ratioGold PriceInternational LiquidityImportsInterest RateBudget DeficitForeign DebtCredit to GDPAppreciationIndustrial ProductionInflation DifferentialLending to Deposit RatesBank DepositsInterest Rate DifferentialM2 to ReservesExports2.592.757.7621.30 1Source: Own calculationsThe respective composite indices are shown in Figure 12.Figure 12: Composite indicator with 18-month time windowsComposite index7060504030201001994/011994/071995/011995/071996/011996/071997/011997/071998/011998/071999/011999/072000/012000/072001/012001/072002/012002/072003/012003/072004/012004/072005/012005/072006/01Source: Own calculationsThe conditional probabilities for the 18-month time window case are shown in Figure 13 on thefollowing page.Knedlik 213
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