It is only recently tht ttempts hve been mde, s in Ghosh nd Ghosh (2002) nd Mulder et l. (2002), to incorporte institutions more systemticlly into erly-wrning systems. But this hs just strted nd systemtic wy in which to model the crisis-relevnt institutionl setting hs not yet been found.
Erly-wrning models focussing solely on CEECs hve completely neglected institutionl fctors. Generlly, empiricl studies on CEECs re scrce, despite the specil importnce of detecting vulnerbilities not only in the run-up to the CEECs' membership of the EU, but especilly lter on during ERM II prticiption. This pper discusses the importnce of infltion nd currency stbility s the wy of the economy development of emerging countries. The pper is structured s follows. First, look is tken t the theoreticl pproches dopted to explin currency crises nd the importnce of infltion nd currency stbility on the development of emerging economies. This prt prticulrly seeks to show the chnnels through which institutions cn influence country's vulnerbility to currency crises. In the second section, n econometric logit model is used to exmine the extent to which institutionl fctors cn serve s erly-wrning indictors for currency crises in Estern Europe.
Recent yers hve witnessed d...
Such low levels of infltion hve not been seen since before World Wr II, when, mostly tinder the discipline of the gold stndrd system of fixed exchnge rtes, prices were roughly stble nd episodes of defltion were not uncommon. The recent decline of infltion in emerging mrkets looks ll the more impressive ginst the bckground of the 11970s nd 1980s. Infltion begn to rise grdully in the 1950s, but it ccelerted drmticlly in the 1970s nd erly 1980s, culminting in severl episodes of triple-digit nnul infltion nd four mjor hyperinfltions in the lte 1980s/erly 1990s. From tht point on, disinfltion ws steep.
This rise nd fll of infltion in emerging mrkets ppers to reflect in prt chnges in the interntionl monetry system nd infltion trends in dvnced countries. One notble feture of the post-World Wr II period ws n increse in infltion persistence compred with erlier historicl ers, when infltion ws either generlized nd grdul (e.g., following the gold discoveries of the fifteenth through the nineteenth century), or rpid nd specific, reflecting exceptionl fiscl strins (s during or immeditely fter wrs). This grdul increse in the persistence of infltion, combined with the brekup of the Bretton Woods interntionl system of commodity-bsed money nd the ssocited removl of externl constrints on ccommodtive monetry policies, mde it possible for the supply shocks of the 1970s to push world infltion to unprecedented pecetime levels, producing the "Gret Infltion" of the 1970s nd erly 1980s. To the extent tht emerging mrkets imported this infltion, loosened fiscl policies, nd lso dopted incresingly ccommodtive monetry policies during the period, these externl trends were