Currency Crises Early Warning Systems: why they should be Dynamic

This paper introduces a new generation of Early Warning Systems (EWS) which takes into account dynamics within a system composed by binary variables. We elaborate on Kauppi and Saikonnen (2008), which allows to consider several dynamic specifications and to use an exact maximum likelihood estimation method. Applied so as to predict currency crises for fifteen countries, this new EWS turns out to exhibit significantly better predictive abilities than the existing models both within and out of the sample.