ABSTRACT
The objective of this work is to develop an early warning system (EWS) model to estimate the probability of a devaluation in Angola. We discuss the exchange market pressure (EMP), a measure that is commonly used in the literature to identify a crisis event and used as the dependent variable in EWS models, and find that is not always a valid proxy for devaluation pressures. The intuition is that the EMP would always be a correct measure if all the exogenous shocks to the economy imply the same pattern of correlations between the variables used to construct the EMP measure. We specify a stylized model for the Angola economy to show that this is possibly not the case and opt to define a devaluation event with an actual devaluation. We use the same model to identify the fundamentals that are likely to predict the event of a devaluation in Angola and estimate a EWS model. We find that fluctuations in the oil price and in the degree of dollarization are the main drivers of the probability of a devaluation. The estimated model is statistically and economically significant and can be used as a complementary tool by the policy maker.
