The current financial, banking and currency crisis that has existed over the past few decades have caused substantial social, economic, political and organizational damage for countries which have experienced the same. In this proposal, I evaluate the efficiency of early warning signs for economic disasters. In this work, I will search for the early warning signs that could be an indication of significant risks in economies still developing. At the same time, I will provide high level analysis of both traditional and modern literature on the discussion on financial crisis in attempt to develop and extraction of potential warning signs that come early suggested by Kaminsky, (1997).

In addition to the theories developed by other researchers, a test of the candidate indicators will be performed in a different empirical research that shall be reviewed in this development. The outcomes of this research will be mixed while at the same time encouraging future researchers to perform further research along the same lines. The analysis developed in this research will receive an extension to a system of criticism to the early warning signs basing on international institutions. In order to define my dependent variable, I will put together a crisis incidence measure that is non-ending with a perfect combination of employment loss and outcome combining them with a hidden crisis occurrence data base.

Not in similarity to modern researches, I will develop and explicit account of an uncertainty model in a dual-king of step.  First and foremost, for a single indicator, I determine significant prediction horizon with the use of a vector auto regression. Secondly, I will perform an identification of indicators that are most useful with the help of the Bayesian model averaging. The outcomes of this study provide suggestions that private credit, housing prices, credit growth and other global variables are worth monitoring as significant risk indicators which is in line with the study presented by Chui (2002).