Would the Publication of the Indicators Erode Their Early Warning Role

It is sometimes argued that if the indices of crisis vulnerability were made publicly available on a timely basis, such publication could prompt a self-fulfilling run on a country's currency or its banks. Alternatively, it is sometimes asserted that if countries really paid heed to the message of the indicators and took preemptive action, then the indicators would lose predictive power. This latter outcome would, of course, be highly desirable. While neither of these arguments can be dismissed lightly, we would regard both as exaggerated.

The conditions for generating this type of self-fulfilling runs are likely to be relatively rare. As we have stressed throughout this book, the signals approach is useful in identifying cases of high vulnerability to crises. Explaining the precise timing of the crises remains an elusive goal. To the extent that timing matters and that investment decisions are made under uncertainty, there is little reason to expect that moderate increases in the extent of vulnerability are likely to be sufficient to prompt a speculative attack. As argued earlier, negative announcements of the readings in the leading indicator index of business cycles—which have been published for many years—do not cause a recession, although investors certainly take these readings into account.

By the same token, we think it unlikely that publication would cause the indicators to lose most of their predictive ability. This could certainly occur if preemptive policy was an everytime, everywhere phenomenon and if such preemptive policies were in fact successful in staving off crises. These are strong assumptions. All too often, policymakers are inclined to ignore distress signals on the grounds that, this time, the situation is really different or that there are overriding political objectives

SUMMARY OF RESULTS AND CONCLUDING REMARKS 109

against corrective action. Furthermore, even if the signals are heeded and corrective policy actions are taken, they may not be sufficient to prevent the crisis. If the feedback from the indicators to corrective policy action were strong and consistent, we would not have been able to identify useful indicators in the first place. Of course, one could always speculate that future policymakers will be wiser than their predecessors, but that remains to be seen.

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