Early Warning Indicators of Economic Crises
In: CNB Financial Stability Report 2011/2012
AbstractMonitoring a suitable set of early warning indicators is crucial for the optimal timing of macroprudential measures aimed at reducing the risk of financial crises or at least mitigating their impact on the economy. This article sets out to identify the indicators that should be monitored and to show how to overcome some problems in identifying them. As it is important to focus on robust indicators that are independent of the choice of model, the article combines two mutually complementary crisis measures: the timing of crisis occurrence and the intensity of the impact of crises on the economy. The article goes on to demonstrate that it is appropriate to rely on a system of several complementary models. For a set of 40 advanced EU and OECD countries, our two-model system identifies rising house prices and external debt as the best performing early warning indicators. Global variables, such as the volume of credit, global GDP and crude oil prices, form another useful set of indicators.
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This chapter was published in: Jan Babecky & Tomas Havranek & Jakub Mateju & Marek Rusnak & Katerina Smidkova & Borek Vasicek CNB Financial Stability Report 2011/2012, , chapter Thematic Article 2, pages 112-117, 2012.
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