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What macroeconomic conditions lead financial crises?

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  • Kiley, Michael T.

Abstract

Research has suggested that a rapid pace of nonfinancial borrowing reliably precedes financial crises, placing the pace of debt growth at the center of frameworks for the deployment of macroprudential policies. I reconsider the role of asset-prices and current account deficits as leading indicators of financial crises. Run-ups in equity and house prices and a widening of the current account deficit have substantially larger (and more statistically-significant) effects than debt growth on the probability of a financial crisis in standard crisis-prediction models. The analysis highlights the value of graphs of predicted crisis probabilities in an assessment of predictors. Nonetheless, the economic and statistical significance of the results is much stronger when the set of crises around the world in the late 2000s are included in the analysis, highlighting challenges in empirical analyses of (infrequent) financial crises.

Suggested Citation

  • Kiley, Michael T., 2021. "What macroeconomic conditions lead financial crises?," Journal of International Money and Finance, Elsevier, vol. 111(C).
  • Handle: RePEc:eee:jimfin:v:111:y:2021:i:c:s0261560620302722
    DOI: 10.1016/j.jimonfin.2020.102316
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Debt, Asset Prices, and Financial Crises
      by thebusinesscycleblog in The business cycle blog on 2018-06-20 18:36:52

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    3. Galstyan, Vahagn & Herzberg, Valerie, 2018. "External Balance Sheet Risks in Ireland," Financial Stability Notes 9/FS/18, Central Bank of Ireland.
    4. Maarten van Oordt, 2018. "Calibrating the Magnitude of the Countercyclical Capital Buffer Using Market-Based Stress Tests," Staff Working Papers 18-54, Bank of Canada.

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    More about this item

    Keywords

    Equity prices; House prices; Debt; Current account; Financial crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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