Early warning system for currency crises: Case Study of Pakistan
Author: Shahab Khan

Following the collapse of the Bretton Woods system of exchange rate management in the 1970s, the frequency of financial crises as well as the number of countries involved tends to increase. Even today, financial crises are still a major threat to many economies in the world and will undoubtedly continue in the future. Pakistan is no exception. With an open economy, Pakistan has experienced several financial crises. The enormous impacts and huge recovery cost of financial crises encourage policy makers and economists to find ways to prevent these crises. This study aims to make a contribution in this field by constructing models to predict financial crises, in particular for Pakistan. It adopts and extends the signal model proposed by Kaminsky et al. (1998) as well as the discrete choice model i.e Logit and Probit proposed by Eichengreen et al. (1996) and Frankel and Rose (1996). The empirical findings indicate that these models perform well in predicting the Pakistan currency crises within the 24-month crisis window; however, the Signaling Model outperforms the other two models for both within and out of samples. Finally, the findings in this thesis support the argument that financial crises may be predicted and hence preventative measures may be implemented to deal with potential crises in the.future. Supervisor:- Dr. Hasan Muhammad Mohsin

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Keywords : currency crises, Pakistan, warning system
Supervisor: Hassan Muhammad Mohsin

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