Working Paper "EFSD Early Warning System: Developing Tools to Predict Currency Crises"
Analysts at the Eurasian Fund for Stabilization and Development (EFSD) have prepared a new Working Paper titled "EFSD Early Warning System: Developing Tools to Predict Currency Crises". This study was an important step in the implementation of the task outlined in the EFSD Strategy 2022–2026, and is aimed at creating an effective Early Warning System (EWS) that can identify and comprehensively assess threats to macroeconomic stability in the Fund's recipient countries (Armenia, Belarus, Kyrgyzstan, Tajikistan).
This paper presents a methodology and a step-by-step algorithm for the development of tools to identify imbalances (crises) and stress situations in the economy. Taking into account the peculiarities of the economic development of the analysed countries and the challenges faced by Armenia, Belarus, Kyrgyzstan and Tajikistan in the period from January 2006 to the present, the main emphasis of the study was placed on the development of tools for the prompt detection of growing tensions in the foreign exchange market.
Drawing on international best practices in EWS development, this study encompasses all stages — from data collection and primary data processing to the intricacies of development and search for predictive models. The research employs traditional data analysis approaches and methods, including signal approach or leading indicator model as well as binary choice models or logit/probit models, to enhance the EWS tools. In addition, in order to take into account the uncertainty factor, the authors proposed to add the Dynamic Model Averaging (DMA) and Dynamic Model Selection (DMS) methods to the list of tools used, as they showed relatively high efficiency in the study.
The EFSD analysts are committed to advancing their research with a series of papers focused on developing analytical and forecasting tools that will further strengthen the identification of macroeconomic stability threats, as the EFSD Early Warning System requires continuous development and enhancement.