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An Early Warning Model for Predicting Credit Booms using Macroeconomic Aggregates

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Listed:
  • Alexander Guarín

    ()

  • Andrés González

    ()

  • Daphné Skandalis

    ()

  • Daniela Sánchez

    ()

Abstract

In this paper, we propose an alternative methodology to determine the existence of credit booms, which is a complex and crucial issue for policymakers. In particular, we exploit the Mendoza and Terrones (2008)’s idea that macroeconomic aggregates other than the credit growth rate contain valuable information to predict credit boom episodes. Our econometric method is used to estimate and predict the probability of being in a credit boom. We run empirical exercises on quarterly data for six Latin American countries between 1996 and 2011. In order to capture simultaneously model and parameter uncertainty, we implement the Bayesian model averaging method. As we employ panel data, the estimates may be used to predict booms of countries which are not considered in the estimation. Overall, our findings show that macroeconomic variables contain valuable information to predict credit booms. In fact, with our method the probability of detecting a credit boom is 80%, while the probability of not having false alarms is greater than 92%.

Suggested Citation

  • Alexander Guarín & Andrés González & Daphné Skandalis & Daniela Sánchez, 2012. "An Early Warning Model for Predicting Credit Booms using Macroeconomic Aggregates," Borradores de Economia 723, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:723
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    References listed on IDEAS

    as
    1. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Ignacio Lozano & Alexander Guarín, 2014. "Fragilidad Bancaria en Colombia: Un Análisis Basado en las Hojas de Balance," Borradores de Economia 813, Banco de la Republica de Colombia.
    2. Alexander Guarín-López & Ignacio Lozano-Espitia, 2016. "Credit Funding and Banking Fragility: An Empirical Analysis for Emerging Economies," BORRADORES DE ECONOMIA 014306, BANCO DE LA REPÚBLICA.
    3. Franz Hamann & Rafael Hernández & Luisa Silva & Fernando Tenjo G., 2014. "Leverage Pro-cyclicality and Bank Balance Sheet in Colombia," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 32(73), pages 50-76.
    4. Ignacio Lozano & Alexander Guarín, 2014. "Banking fragility in Colombia: An empirical analysis based on balance sheets," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 32(75), pages 48-63, December.
    5. Franz Alonso Hamann Salcedo & Rafael Hernández & Luisa Fernanda Silva EScobar & Fernando Tenjo Galarza, 2013. "Credit Pro-cyclicality and Bank Balance Sheet in Colombia," Borradores de Economia 762, Banco de la Republica de Colombia.
    6. Urbina, Jilber, 2016. "Crecimiento del crédito en Nicaragua, ¿Crecimiento natural o boom crediticio?
      [Credit growth in Nicaragua: Natural growth or credit boom?]
      ," MPRA Paper 75577, University Library of Munich, Germany, revised Nov 2016.
    7. repec:eee:ememar:v:32:y:2017:i:c:p:168-189 is not listed on IDEAS
    8. Juan Guillermo Bedoya Ospina, 2017. "Ciclos de crédito, liquidez global y regímenes monetarios: una aproximación para América Latina," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, vol. 78, February.
    9. Carlos Quicazán, "undated". "Profundización Financiera y su efecto en las Firmas en Colombia," Temas de Estabilidad Financiera 070, Banco de la Republica de Colombia.

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    Keywords

    Early Warning Indicator; Credit Booms; Business Cycles; Emerging Markets. Classification JEL:E32; E37; E44; E51; C53.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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