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Banking, Debt, and Currency Crises: Early Warning Indicators for Developed Countries

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Abstract

We construct and explore a new quarterly dataset covering crisis episodes in 40 developed countries over 1970–2010. First, we examine stylized facts of banking, debt, and currency crises. Using panel vector autoregression, we confirm that currency and debt crises are typically preceded by banking crises, but not vice versa. Banking crises are also the most costly in terms of the overall output loss, and output takes about six years to recover. Second, we try to identify early warning indicators of crises specific to developed economies, accounting for model uncertainty by means of Bayesian model averaging. Our results suggest that onsets of banking and currency crises tend to be preceded by booms in economic activity. In particular, we find that growth of domestic private credit, increasing FDI inflows, rising money market rates as well as increasing world GDP and inflation were common leading indicators of banking crises. Currency crisis onsets were typically preceded by rising money market rates, but also by worsening government balances and falling central bank reserves. Early warning indicators of debt crises are difficult to uncover due to the low occurrence of such episodes in our dataset. Finally, employing a signaling approach we show that using a composite early warning index significantly increases the usefulness of the model when compared to using the best single indicator (domestic private credit).

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Bibliographic Info

Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2012/20.

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Length: 40pages
Date of creation: Jul 2012
Date of revision: Jul 2012
Handle: RePEc:fau:wpaper:wp2012_20

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Keywords: Early warning indicators; Bayesian model averaging; macro-prudential policies;

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Cited by:
  1. Behn, Markus & Detken, Carsten & Peltonen, Tuomas A. & Schudel, Willem, 2013. "Setting countercyclical capital buffers based on early warning models: would it work?," Working Paper Series 1604, European Central Bank.
  2. António R. Antunes & Diana Bonfim & Nuno Monteiro & Paulo M.M. Rodrigues, 2014. "Early Warning Indicators of Banking Crises: Exploring new Data and Tools," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  3. Babecký, Jan & Havránek, Tomáš & Matějů, Jakub & Rusnák, Marek & Šmídková, Kateřina & Vašíček, Bořek, 2013. "Leading indicators of crisis incidence: Evidence from developed countries," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 1-19.
  4. Raymond Chaudron & Jakob de Haan, 2014. "Identifying and dating systemic banking crises using incidence and size of bank failures," DNB Working Papers 406, Netherlands Central Bank, Research Department.
  5. Ramsay, Bruce A. & Sarlin, Peter, 2014. "Ending over-lending: Assessing systemic risk with debt to cash flow," Research Discussion Papers 11/2014, Bank of Finland.
  6. Diana Bonfim & Nuno Monteiro, 2013. "The implementation of the countercyclical capital buffer: rules versus discretion," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  7. Megersa, kelbesa & Cassimon, Danny, 2013. "Assessing Indicators of Currency Crisis in Ethiopia: Signals Approach," MPRA Paper 47151, University Library of Munich, Germany.
  8. Željka Asanović, 2013. "Early Warning Systems for Banking Crises in Montenegro: Combination of Signal Approach and Logit Model," Transition Studies Review, Springer, vol. 20(3), pages 405-419, November.
  9. Vasyl Khomiak, 2013. "Does the contagion effect of the Balance of Payment crisis exist? Ukrainian case," Review of Applied Socio-Economic Research, Pro Global Science Association, vol. 6(2), pages 151-159, December.
  10. Fernández Olit, Beatriz & De La Cuesta González, Marta, 2014. "Evaluación de impactos ambientales y sociales del negocio de banca comercial en Europa durante el periodo 2006-2010/Assessment of Social and Environmental Impacts Originated in Europe during the Peri," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 32, pages 567-592, Mayo.
  11. Jakub Mateju, 2013. "Explaining the Strength and the Efficiency of Monetary Policy Transmission: A Panel of Impulse Responses from a Time-Varying Parameter Model," Working Papers IES 2013/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2013.

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