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Identifying the Predictors for Financial Crisis Using Gibbs Sampler

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  • Jin-Lung Lin
  • Chung-Shu Wu
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    Abstract

    The Asian financial crisis broke out in Thailand in July 1997, and rapidly spread throughout the neighboring countries. An important question then arises? Is it possible to predict next financial crisis? If yes, then what are the predictors? The answer lies in combined usage of economic theory and econometric methods. By using the economic theory, one can locate possible potential crisis predictors whereas appropriate econometric models can pinpoint effective ones. In this paper we suggest using the Stochastic Search Variable Selection (SSVS) developed by George and McCulloch (1993) to identify the crisis predictors. As is suggested by the name, SSVS stochastically searches for practically significant variables. Each variable coefficient is assumed to come from a mixture of two normal variates with respectively large and small variances. For the former case, this variable is considered as insignificant and should be excluded from the model whereas for the latter, this variable is significant and should be included in the model. SSVS is not affected by the ordering of the candidate variables and is particularly effective when the sample size is much smaller than the number of all possible models. By employing SSVS method, we conclude that annual growth rate of money supply, $M_2$, and the ratio of government debt to GDP are promising predictors for financial crisis. It is worth mentioning that the frequently mentioned factors, such as ratio of total foreign reserve to GDP and the ratio of current deficit to GDP are not selected by our analysis. Our empirical analysis implies that monetary and fiscal policy play a crucial role in exploring the Asian financial crisis.

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    Bibliographic Info

    Paper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2001_08.

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    Length: 18 pages
    Date of creation: 03 Jun 2001
    Date of revision:
    Handle: RePEc:eei:rpaper:eeri_rp_2001_08

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    Related research

    Keywords: Financial crisis; early warning;

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    References

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    1. 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.).
    2. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
    3. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
    4. Robert Flood & Nancy Marion, 1998. "Perspectives on the Recent Currency Crisis Literature," NBER Working Papers 6380, National Bureau of Economic Research, Inc.
    5. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis?," Temi di discussione (Economic working papers) 343, Bank of Italy, Economic Research and International Relations Area.
    6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
    7. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February.
    8. Agénor,Pierre-Richard & Miller,Marcus & Vines,David & Weber,Axel (ed.), 1999. "The Asian Financial Crisis," Cambridge Books, Cambridge University Press, number 9780521770804, October.
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