ECB paper tweaks the evaluation of early warning systems

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A working paper, published by the European Central Bank (ECB) on February 1, proposes a new technique for evaluating the costs and benefits of using a particular early warning system to predict financial crises.

The author, Peter Sarlin, seeks to improve the existing loss functions and usefulness measures designed to evaluate the systems. Loss functions tally the costs of a system, which usually stem from false alarms and missed crises, while usefulness measures compare the system's total loss w