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Early Warning Indicators for Asset Price Booms

Author

Listed:
  • Dieter Gerdesmeier

    () (European Central Bank)

  • Hans-Eggert Reimers

    () (Hochschule Wismar, Germany)

  • Barbara Roffia

    () (European Central Bank)

Abstract

The recent financial crisis has demonstrated in an impressive way that boom/bust cycles can have devastating effects on the real economy. This paper aims at contributing to the literature on early warning indicator exercises for asset price booms. Using a sample of 17 industrialized OECD countries and the euro area over the period 1969 Q1 ¨C 2010 Q2, an asset price composite indicator incorporating developments in both stock and house price markets is constructed. The latter is then further developed in order to identify periods that can be characterized as asset price booms. The subsequent empirical analysis is based on a probit-type approach incorporating several monetary, financial and real variables. Following some statistical tests, credit aggregates, the investment-to-GDP ratio, the interest rate spread together with the house price growth gap and stock price developments appear to be useful indicators for the prediction of asset price booms up to two years ahead.

Suggested Citation

  • Dieter Gerdesmeier & Hans-Eggert Reimers & Barbara Roffia, 2011. "Early Warning Indicators for Asset Price Booms," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 1-19, June.
  • Handle: RePEc:bap:journl:110301
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Reimers, Hans-Eggert, 2012. "Early warning indicator model of financial developments using an ordered logit," Wismar Discussion Papers 06/2012, Hochschule Wismar, Wismar Business School.
    2. Dieter Gerdesmeier & Andreja Lenarčič & Barbara Roffia, 2015. "An alternative method for identifying booms and busts in the Euro area housing market," Applied Economics, Taylor & Francis Journals, vol. 47(5), pages 499-518, January.
    3. André Tomfort, 2017. "Detecting Asset Price Bubbles: A Multifactor Approach," International Journal of Economics and Financial Issues, Econjournals, pages 46-55.
    4. Hans-Eggert Reimers, 2012. "Early Warning Indicator Model of Financial Developments Using an Ordered Logit," Business and Economic Research, Macrothink Institute, pages 171-191.
    5. Eva Schlenker & Robert Maderitsch, 2015. "Monitoring household liquidity constraints across Europe: a panel approach," International Economics and Economic Policy, Springer, pages 75-91.
    6. Akio Hattori & Kentaro Kikuchi & Fuminori Niwa & Yoshihiko Uchida, 2014. "A Survey of Systemic Risk Measures: Methodology and Application to the Japanese Market," IMES Discussion Paper Series 14-E-03, Institute for Monetary and Economic Studies, Bank of Japan.

    More about this item

    Keywords

    House prices; Stock prices; Asset price booms; Probit models; Credit aggregates;

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises

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