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What Macroeconomic Conditions Lead Financial Crises?

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  • Michael T. Kiley

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.

Suggested Citation

  • Michael T. Kiley, 2018. "What Macroeconomic Conditions Lead Financial Crises?," Finance and Economics Discussion Series 2018-038, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2018-38
    DOI: 10.17016/FEDS.2018.038
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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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    2. Galstyan, Vahagn & Herzberg, Valerie, 2018. "External Balance Sheet Risks in Ireland," Financial Stability Notes 9/FS/18, Central Bank of Ireland.
    3. 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

    Current account; Debt; Equity prices; Financial crisis; House prices;
    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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