# Currency Crises Prediction Using Deep Neural Decision Trees
## 1 Introduction  
Currency crises can have a catastrophic impact on the real economy in a short space of time. In general, they occur when there is a sudden devaluation in a currency, often resulting in a speculative attack on the international currency market. Currency crises can also occur as a result of high balance of payments deficits or when governments are unable to restore the value of their currency after a fall in its price in the markets. One of the first currency crises occurred in 1992 when many European countries faced a crisis as part of the Exchange Rate Mechanism (ERM). Another episode was the currency crisis suffered by the Mexican peso in December 1994. This crisis began with an abrupt decision by the Mexican government to devalue its currency, causing a crash in the peso days later and an economic crisis that resulted in a sharp drop in GDP. However, the biggest event has been the Asian Financial Crisis in 1997. The crisis began with the sharp devaluation of the Thai baht and was the first to show theeffect of contagion on other countries. However, the event was about more than just speculation on the Thai currency and saw the collapse of Asian stock markets. The financial crisis that began with the devaluation of the Thai baht exchange rate resulted in a sharp increase in interest rates and the collapse of many companies, as well as an increase in the cost of credit and a general fall in GDP in the region [1]. This resulted in foreign and national investors pulling out investment. Not only did this crisis affect Asian countries, but it also had a negative impact on other emerging economies, especially in Latin America, showing that currency crises are not limited to a specific economy. Globalization can increase the economic difficulties of societies and affect the structure of national economies after the real economy has suffered a damaging impact [2]. Figure 1 shows the number of currency crises per year at the international level. On the other hand, it is interesting to influence the economic consequences that currency crises can cause. Reference [3] demonstrated that a currency crisis makes it difficult to design an optimal monetary policy, making the setting of the interest rate a dilemma; since, if it increases, it makes it difficult to lend money to companies, and, if it decreases, it devalues the debt denominated in foreign currency. They concluded that the best decision is to reduce the interest rate, thanks to the continuous international financial development and the increase in credit flows. Following this argument, some works indicated that currency crises deteriorate the balance sheets of companies based on the fact that, if prices are rigid, a depreciation of the currency leads to an increase in the obligations of payment of the debt in the foreign currency of companies, causing a fall in their profits [4; 5]. This reduces the borrowing capacity of companies and, therefore, investment and production in an economy with credit limitations which, in turn, reduces the demand for the national currency and leads to depreciation. Other authors presented a general equilibrium model of currency crises and how they are driven by credit restrictions and rigidity of nominal prices [6; 7; 8]. They showed that an increase in the interest rate to support the currency in crisis may not be effective, but that relaxation of short-term loan facilities can make this policy effective by mitigating the increase in interest rates for companies [9]. In addition to interest rate policy being an instrument to end a currency crisis, intervention in the foreign exchange market is also a measure to stabilize inflation and production as a result of this type of crisis. They demonstrated how intervention in the foreign exchange market improves the situation of the economy, regardless of the exchange rate regime chosen by the country. It can achieve great results if the economy  
Figure 1: Number of currency crises in the world (1970–2017).