AN EARLY WARNING SYSTEM FOR CURRENCY CRISIS

Abstract

This paper constructs a standardized index of speculative pressure (SISP) for Jordan to predict a currency crisis. The basic idea behind signal approach is that the behavior of mainly macroeconomic factors changed before a currency crisis from that of tranquil periods. The performance of standardized ISP is conducted and if a certain threshold value of 1.25 standard deviations is crossed during the signaling period of eight quarters, it is judged as a warning of possible currency crisis. The major findings of this study is that Jordan standardized ISP produced an excellent signal preceding the crisis of 1988/1989. Also, the standardized ISP shows that currency crisis is not to be expected for the next two years, 2016 and 2017