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Signals from housing and lending booms

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  • Bunda, Irina
  • Ca' Zorzi, Michele

Abstract

The contribution of this paper is to revisit the Early Warning System (EWS) literature by analysing selected episodes of financial market crisis, i.e. those preceded by a spell of credit and real estate expansions. The aim is to disentangle instances when this constitutes a natural phenomenon associated with a process of financial development and innovation from those where it constitutes a worrisome signal. We identify economic variables that have leading indicator properties, thus helping to distinguish between “benign” episodes from those likely ending with downward pressures on the exchange rate or even a fully-fledged banking crisis. We find that a large current account deficit, a fall in price competitiveness, strong real growth and high public debt-to-GDP ratio increase the probability that a lending or housing boom would be accompanied by financial market tensions shortly after the peak. JEL Classification: E32, F31, F37

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Paper provided by European Central Bank in its series Working Paper Series with number 1094.

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Date of creation: Sep 2009
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Handle: RePEc:ecb:ecbwps:20091094

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Keywords: credit booms; Early Warning System; Financial crises; House prices;

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Citations

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Cited by:
  1. Alessio Ciarlone, 2012. "Wealth effects in emerging economies," Temi di discussione (Economic working papers) 843, Bank of Italy, Economic Research and International Relations Area.
  2. Chan Lily & Ng Heng Tiong & Rishi Ramchand, 2012. "A cluster analysis approach to examining Singapore’s property market," BIS Papers chapters, in: Bank for International Settlements (ed.), Property markets and financial stability, volume 64, pages 43-53 Bank for International Settlements.
  3. Ponomarenko, Alexey, 2012. "Early warning indicators of asset price boom/bust cycles in emerging markets," BOFIT Discussion Papers 22/2012, Bank of Finland, Institute for Economies in Transition.
  4. Luis M. Cubeddu & Camilo Ernesto Tovar Mora & Evridiki Tsounta, 2012. "Latin America," IMF Working Papers 12/193, International Monetary Fund.

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