On crisis models: An alternative crisis definition

In this paper we question the consensus of using a binary crisis definition for empirical crisis models. We believe that the most severe shortcomings of the crisis models today are in the crisis definition rather than the explanatory variables. We present a crisis model that is specified for a continuous crisis definition especially designed to describe extreme exchange-rate and interest-rate events in emerging markets. The crisis variable successfully portrays the crises of the 1990s and the estimated models perform excellently in explaining these events.