East Asian Financial Crisis of 1997 Revisited: Is it Possible to Devise an Early Warning System?

This study examines the causes of the East Asian financial crisis and presents an early warning system based on data from Malaysia, Indonesia, Thailand, Singapore, and Philippines during 1982:1–1998:1 through a panel probit regression model using 20 monthly macroeconomic and financial sector variables. Results indicate that the significant variables are current account/GDP , domestic credit/GDP , terms of trade, lending and deposit rate spread, and foreign direct investment/GDP . Evidence further suggests that the probability of the crisis increases with an increase in domestic credit/GDP , M1, imports, and foreign direct investment/GDP . The probability of the crisis increases with a decrease in exports, stock prices, terms of trade, current account, and lending and deposit rate spread. The model correctly indicates 64% of the crises and 77% of the tranquil periods even with a cut-off probability of 10%,