Why EWSs for financial crises failed during the Covid-19 pandemic: The example of Serbia

Nikolić, Ivan and Kovačević, Miladin and Stančić, Katarina (2023) Why EWSs for financial crises failed during the Covid-19 pandemic: The example of Serbia. Економика предузећа, 69 (3-4). pp. 151-160. ISSN 0353-443X

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Abstract

Early warning systems (EWSs) are designed to anticipate future crises, giving policymakers optimism that they would be able to make proactive management decisions. The demonstration of EWSs effectiveness in the economy was clear throughout the Asian financial crisis at the end of the 1990s, the financial crisis of 2007-2008, the Great Recession, and the European sovereign debt crisis of 2008-2012. However, EWSs failed during the COVID-19 pandemic. Using Eichengreen et al. [13], Kaminsky et al. [23], and Sachs et al. [33] methodology, the paper explains this phenomenon by analyzing the determinants of currency crises episodes in the Republic of Serbia from January 2001 to December 2021. The complexity of the current crisis required a change of approach. As reflected by the Statistical Office of the Republic of Serbia, one of the solutions is to develop a Decision-Making Support System (DMSS). EWSs presented here could serve as one of the many inputs in the assessment and identification of financial crises. However, these models are not accurate enough to be used as the sole method to anticipate crises. Like other crisis models, they bring benefits but obviously have their drawbacks. That is why it would be good to put them under the auspices of a more complex DMSS. Again, for now DMSS should be seen just as a better alternative to earlier practice. This is neither a final nor an almighty option, but it must be further worked on in the future.

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