What is the most prominent reserve indicator that forewarns currency crises?

In this study, the predictive powers of three indicators of international reserve adequacy, namely short-term debt-to-total reserves ratio, broad money-to-total reserves ratio, and reserves in months of imports on currency crisis are analysed. We show that while each indicator has the potential in predicting the probability of a crisis, the ratio of broad money-to-total reserves is a better and more robust indicator. While it is not possible to regulate the other two indicators, central banks have significant power in determining the ratio of broad money-to-total reserves and hence do have the capability of monitoring and possibly preventing or taming currency crises using this power. •Short-term debt and broad money to reserves ratios and reserves in months of imports are indicators of currency crises.•This paper shows that, the broad money-to reserves ratio is the most prominent one that forewarns a currency crisis.•An overly expansionary monetary policy pushes the broad money ratio to a level that makes a currency crisis inevitable.•In any case, central banks should try to avoid broad money exceeding 6 times of total reserves.