What is Real Interest Rate

To maintain financial stability, prevention of financial crisis is very important. This prevention is especially is especially important for developing countries where we need robust instruments for prediction of financial crises. One such instrument is Early Warning System (EWS). An EWS provided signals that could reflect the likelihood of a financial crisis over a given time horizon. Changing nature of financial risks due to liberalization of economies has increased the importance of an effective EWS. This chapter explores the state of the art of EWS. It is suggested that policy makers should take into account their objectives and related thresholds of various while developing an EWS since there exists a sharp trade-off between correctly calling crises and false alarms.