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Credit, Asset Prices, and Financial Stress in Canada

  • Miroslav Misina
  • Greg Tkacz

Historical narratives typically associate financial crises with credit expansions and asset price misalignments. The question is whether some combination of measures of credit and asset prices can be used to predict these events. Borio and Lowe (2002) answer this question in the affirmative for a sample of 34 countries, but the question is surprisingly difficult to answer for individual developed countries that have faced very few, if any, financial crises in the past. To circumvent this problem, we focus on financial stress and ask whether credit and asset price movements can help predict it. To measure financial stress, we use the Financial Stress Index (FSI) developed by Illing and Liu (2006). Other innovations include the estimation and forecasting using both linear and endogenous threshold models, and a wide range of asset prices (stock and housing prices, for example). The exercise is performed for Canada, but the methodology is suitable for any country that fits the above description.

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Paper provided by Bank of Canada in its series Working Papers with number 08-10.

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Length: 32 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocawp:08-10
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  1. Reinhart, Carmen & Kaminsky, Graciela, 2000. "Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
    [The twin crises: Te causes of banking and balance of payments problems]
    ," MPRA Paper 13842, University Library of Munich, Germany.
  2. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  3. Elke Hanschel & Pierre Monnin, 2005. "Measuring and forecasting stress in the banking sector: evidence from Switzerland," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 431-49 Bank for International Settlements.
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