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Early Warning Indicators of Economic Crises

In: CNB Financial Stability Report 2011/2012

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  • Jan Babecky
  • Tomas Havranek
  • Jakub Mateju
  • Marek Rusnak
  • Katerina Smidkova
  • Borek Vasicek

Abstract

Monitoring 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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Bibliographic Info

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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.

This item is provided by Czech National Bank, Research Department in its series Occasional Publications - Chapters in Edited Volumes with number fsr1112/2.

Handle: RePEc:cnb:ocpubc:fsr1112/2

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References

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  1. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
  2. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
  3. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
  4. Theoharry Grammatikos & Robert Vermeulen, 2010. "Transmission of the Financial and Sovereign Debt Crises to the EMU: Stock Prices, CDS Spreads and Exchange Rates," LSF Research Working Paper Series 10-13, Luxembourg School of Finance, University of Luxembourg.
  5. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  6. Andrew K. Rose & Mark M. Spiegel, 2009. "Cross-country causes and consequences of the 2008 crisis: early warning," Working Paper Series 2009-17, Federal Reserve Bank of San Francisco.
  7. Kaminsky, Graciela L., 2006. "Currency crises: Are they all the same?," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 503-527, April.
  8. Alessi, Lucia & Detken, Carsten, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
  9. Martin Feldkircher & Stefan Zeugner, 2009. "Benchmark Priors Revisited:on Adaptive Shrinkage and the Supermodel Effect in Bayesian Model Averaging," IMF Working Papers 09/202, International Monetary Fund.
  10. Theoharry Grammatikos & Robert Vermeulen, 2011. "Transmission of the Financial and Sovereign Debt Crises to the EMU: Stock Prices, CDS Spreads and Exchange Rates," DNB Working Papers 287, Netherlands Central Bank, Research Department.
  11. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  12. Graciela Laura Kaminsky, 1999. "Currency and Banking Crises," IMF Working Papers 99/178, International Monetary Fund.
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Cited by:
  1. Ionita Rodica -Oana, 2013. "Economic And Financial Periods Induced Through Banking System," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 997-1009, July.

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