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Early Warning Indicator Model of Financial Developments Using an Ordered Logit

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  • Hans-Eggert Reimers

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 development. Using a sample of 17 industrialised OECD countries and the euro area over the period 1969 Q1 ¨C 2011 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 characterised as asset price booms and busts. The subsequent empirical analysis is based on an ordered logit-type approach incorporating several monetary, financial and real variables. Following some statistical tests, credit aggregates, 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 developments.

Suggested Citation

  • Hans-Eggert Reimers, 2012. "Early Warning Indicator Model of Financial Developments Using an Ordered Logit," Business and Economic Research, Macrothink Institute, vol. 2(2), pages 171-191, December.
    • Handle: RePEc:mth:ber888:v:2:y:2012:i:2:p:171-191
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    Cited by:

    1. Mojmír Hampl and Tomáš Havránek, 2017. "Should monetary policy pay attention to house prices? The Czech National Bank’s approach," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential policy frameworks, implementation and relationships with other policies, volume 94, pages 129-140, Bank for International Settlements.
    2. Mojmir Hampl & Tomas Havranek, 2017. "Should Inflation Measures Used by Central Banks Incorporate House Prices? The Czech Approach," Working Papers IES 2017/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2017.
    3. Tomas Havranek & Mojmir Hampl, 2017. "Should Inflation Measures Used by Central Banks Incorporate House Prices? The Czech National Bank's Approach," Research and Policy Notes 2017/01, Czech National Bank.
    4. Jan Bruha & Michal Hlavacek & Lubos Komarek, 2017. "House Prices and Household Consumption: The Case of the Czech Republic," Working Papers 2017/11, Czech National Bank.

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    More about this item

    Keywords

    House prices; Stock prices; Asset price boom-bust-cycle; Ordered logit model;
    All these keywords.

    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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