EARLY WARNING SYSTEM AND CURRENCY VOLATILITY MANAGEMENT IN EMERGING MARKET

Abstract

This paper adopts theoretical models from Candelon, Dumitrescu, and Hurlin and empirical model from Commerzbank to devise a set of indicators that can serve as an early warning system (EWS) on exchange rate. In light of the appreciation of emerging countries’ currencies during the Fed quantitative easing period, it is important to understand on how The Fed normalization would put pressure on managing volatility for central banks, especially for countries with large trade and fiscal deficit such as Indonesia. All in all, using both EWS models, central banks could discern potential exchange rate depreciation for intervention purpose.