EARLY WARNING SYSTEMS OF FINANCIAL CRISES - IMPLEMENTATION OF ACURRENCY CRISIS MODEL FOR UGANDA

The objective of this paper is to implement a prototype of a currency crisis modelas part of an early warning system framework for Uganda. The financial systemsof developing countries like Uganda are especially vulnerable and therefore robustinstruments to predict crises are needed. Our model is based on the signals approachdeveloped by Kaminsky, Lizondo and Reinhart (1998) and Kaminsky andReinhart (1999). The basic idea of the signals approach is to monitor several indicatorsthat tend to exhibit an „unusual” behaviour in the periods preceding a crisis.When an indicator crosses a threshold, then it is said to issue a „signal“ that a currencycrisis may occur within a given period. We implemented this signals approachfor Uganda. One of the main challenges in this connection is that Ugandaduring the analyzed periods had no currency crisis. Therefore, we modified themodel in a way that it estimates some of the performance measures based on empiricalstudies to obtain usable results. The outcomes of our calculations performedwell and were economically validated.