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Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning

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  • Andrew K. Rose
  • Mark M. Spiegel

Abstract

This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a crosssection of 107 countries; we focus on national causes and consequences of the crisis, ignoring crosscountry "contagion" effects. Our model of the incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly-cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of "early warning" systems of potential crises, which must also predict their timing.

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Paper provided by Department of the Treasury, Ministry of the Economy and of Finance in its series Working Papers with number 6.

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Length: 51
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Handle: RePEc:itt:wpaper:wp2009-6

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Keywords: empirical; data; cross section; credit; stock; country; model; international; MIMIC;

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  1. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
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  12. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
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  15. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1390-1407, December.
  16. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, Econometric Society, vol. 40(6), pages 979-1001, November.
  17. Andrew Berg & Catherine Pattillo, 1999. "Are Currency Crises Predictable? A Test," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1.
  18. Christopher J. Mayer & Karen M. Pence & Shane M. Sherlund, 2008. "The rise in mortgage defaults," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2008-59, Board of Governors of the Federal Reserve System (U.S.).
  19. Andrew Berg & Eduardo Borensztein & Catherine A. Pattillo, 2004. "Assessing Early Warning Systems," IMF Working Papers 04/52, International Monetary Fund.
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