Pacific Economic Review, 4: 2 (1999) pp. 165±183 EMPIRICAL INDICATORS OF CURRENCY CRISES IN EAST ASIA TONY S. WIRJANTO  University of Waterloo, Canada Abstract. The paper is concerned with identifying useful indicators of the probability of currency crises in Indonesia, Malaysia, the Philippines, South Korea and Thailand over a period of 22 years, where a currency crisis is defined as a large and infrequent devaluation of a local currency. The leading crisis indicators include international and domestic factors; but they are dominated by the leading indicators from the financial sector, such as the ratio of short-term debt to foreign reserves, the ratio of M2 to foreign reserves, and the indicator representing a regional contagion effect. This result is interpreted as pointing to external illiquidity together with adverse shifts in the market sentiment as the likely catalyst for the 1997±98 East Asia crisis. 1. INTRODUCTION The recent currency and financial crisis in East Asia has rekindled economists' interest in the possible determinants of such a crisis given its unanticipated nature and its unprecedented depth and breadth. Various theories have been advanced in an attempt to provide a plausible explanation for the causes of the crisis. While voluminous in quantity and distinctive in style, the emerging literature can be broadly separated into two main views. One view suggests that the crisis was precipitated by weak economic fundamentals in the region but aggravated subsequently by a market sentiment. Another view exploits the unanticipated nature of the crisis by arguing that sudden shifts in the market sentiment in the region, even in the absence of poor fundamentals, could have acted as a catalyst for the outbreak of the crisis, subsequently sustained and aggravated by their propagation over time and contagion over space. It is safe to say that no single view in the theoretical literature can wholly explain the crisis. The objective of this paper is to search for leading crisis indicators for five East Asia countries, namely Indonesia, Korea, Malaysia, the Philippines and Thailand, using an annual dataset over the period 1975 ± 96. A set of potentially useful indicators are drawn from the predictions of the theoretical literature on the crises as well as from the previous empirical studies in this area. The search is guided by a number of factors. First, this paper focuses the investigation on a small number of countries that share some similarities in # Blackwell Publishers Ltd 1999. 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA TonyS.Wirjanto Department of Economics, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada; E-mail: twirjant@uwaterloo.ca. Financial support from the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged. In writing this paper, I benefited from having a discussion with Wai-Ming Ho, and received research assistance from James Dooks and Sean Gomes and editorial assistance from Carolyn Holden and Donna Schultz. I also thank one of the Editors and an anonymous referee for useful comments and suggestions. The usual disclaimer applies.