Early warning indicators for emerging economies

This paper summarises work on early warning indicators for emerging economies. It describes in particular the use within the BIS of relatively simple indices summarising information about emerging economies currently under pressure in financial markets and those vulnerable to such pressure in the future. The survey of the literature suggests financial crises are typically preceded by overvalued exchange rates, inadequate international reserves, large foreign debt, recessions and excessive credit growth. These indicators are included in the summary indices of vulnerability. The vulnerability indices have modest predictive power for the pressure index but like other early warning signals are best regarded as an aid to analysis rather than a definitive predictive tool.