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Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity

Listed author(s):
  • Alessi, Lucia
  • Detken, Carsten

We test the performance of a host of real and financial variables as early warning indicators for costly aggregate asset price boom/bust cycles, using data for 18 OECD countries. A quasi real time signaling approach is used to predict asset price booms that have serious real economy consequences. We use a loss function to rank the indicators given policy makers' relative preferences with respect to missed crises and false alarms and suggest a new measure for assessing the usefulness of indicators. Global measures of liquidity, in particular a global private credit gap, are the best performing indicators and display forecasting records, which are informative for policy makers interested in timely reactions to growing financial imbalances.

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 27 (2011)
Issue (Month): 3 (September)
Pages: 520-533

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Handle: RePEc:eee:poleco:v:27:y:2011:i:3:p:520-533
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505544

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