Currency crises : models and their possibility in Lithuania

Abstract

Increased integration of the financial markets brought new forms and more global character of the crises episodes. A currency crisis, according to many economists, is a situation in which a currency experiences heavy exchange market pressure. Recent currency crises drawn attention, not only because of their increased frequency but because they have been experienced by a diverse group of countries, including several with large, well-developed economies. A currency crisis can be forestalled if it is detected in its early stage and appropriate measures are undertaken. Following an initial overview of theoretical three generations currency crises models, this paper presents an early warning system of a currency crisis based on a signal approach and assesses currency crisis probability in Lithuania. The system monitors several economic indicators: the values of these indicators are usually different before, during and after a crisis, so their movements can be used to forecast the probability of the onset of a crisis.