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Predicting Instability

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  • Razzak, Weshah

Abstract

Unanticipated shocks could lead to instability, which is reflected in statistically significant changes in distributions of independent Gaussian random variables. Changes in the conditional moments of stationary variables are predictable. We provide a framework based on a statistic for the Sample Generalized Variance, which is useful for interrogating real time data and to predicting statistically significant sudden and large shifts in the conditional variance of a vector of correlated macroeconomic variables. Central banks can incorporate the framework in the policy making process.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22804.

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Date of creation: 19 May 2010
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Handle: RePEc:pra:mprapa:22804

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Keywords: Sample Generalized Variance; Conditional Variance; Sudden and Large Shifts in the Moments;

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," NBER Working Papers 13761, National Bureau of Economic Research, Inc.
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  7. Razzak, W. A., 1991. "Target zone exchange rate," Economics Letters, Elsevier, vol. 35(1), pages 63-70, January.
  8. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  9. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
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