MEASURING AND PREDICTING CURRENCY DISTURBANCES: THE “SIGNALS” APPROACH

This paper examines the two currency disturbances that took placein Croatia, one at the beginning of 1999 and the other in the summer of2001. The “signals” approach is used in constructing an effective sys-tem of early warning indicators heralding currency disturbances. This system monitors the behaviour of various macroeconomic and financial variables that tend to perform unusually in the periods preceding a disturbance or crisis. The paper also proposes composite leading indicators comprising the best signal indicators. The performance of the indicators reveals that the two disturbances were different: the 1999 onecame at the end of a banking crisis, while the 2001 disturbance wasbrought about by a combination of the domestic monetary relaxationand partial capital account liberalization. Since Croatia signed a Stabilization and Association Agreeement with the EU that foresees further capital account liberalization, this system of early warning indicators can help the Croatian National Bank and other relevant policy makers along the way.