Monitoring economic vulnerability and performance: Applications to the Philippines

Monitoring economic vulnerability and performance: Applications to the Philippines

This paper argues that recent spate of banking and currency crises has underscored the need to develop early warning systems. These are based on economic indicators of vulnerability, which can be identified from models and theories of crises. First generation models focus on the inconsistency of macroeconomic policies and the exchange rate peg. Examples of economic indicators derived from this framework are the fiscal deficit, growth of money supply, current account balance and the level of foreign exchange reserves. Second generation models revolve around the possibility of self-fulfilling crises and multiple equilibria. Meanwhile, the 1997 East Asian financial crisis spawned research on third-generation models, which integrated balance sheets of banks and corporations in the framework of second-generation models.

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