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Under current interconnectedness and imperfections of the financial markets, in theory and
practice, there is a permanent interest for identifying the indicators of a systemic crisis. The
markets integration could support the spillover of the crisis in the region. In addition, the
financial markets are not perfect and they do not produce visible and clear signals, enabling
protection of the market participants from the negative consequences of eventual crisis.
Usually, for this purpose, a large set of macroeconomic and financial variables need to be
considered and a composite index as a measure of the vulnerability of the economy or a
complex model needs to be set up, based on the experiences of the countries that have already
faced economic crisis, as well as the features of a specific country. In practice, there are
continuous efforts in this regard, and generally we can conclude that there is no unique
approach that will fit into any case and any country, as well as the fact that only a model or
composite index is not enough to understand the origin of the crisis, and therefore, they have
to be interpreted carefully.
This paper focuses on the mechanisms for identification and prediction of crisis, especially
the currency and balance of payment crisis. Special attention is given to the usefulness of the
early warning crisis in practice worldwide and in the case of Macedonian economy at the
initial stage of the last world crisis. The paper is organized as follows: an overview of literature
is followed by the description of approaches and models used for crisis prediction. Subsequently,
construction and usefulness of Early Warning Systems (EWS) and its application in
Macedonian economy are discussed, and finally, the conclusion is offered.
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