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What Macroeconomic Conditions Lead Financial Crises?

Author

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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 (US).
  • Handle: RePEc:fip:fedgfe:2018-38
    DOI: 10.17016/FEDS.2018.038
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    File URL: https://www.federalreserve.gov/econres/feds/files/2018038pap.pdf
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    References listed on IDEAS

    as
    1. Sebastian Edwards, 2002. "Does the Current Account Matter?," NBER Chapters,in: Preventing Currency Crises in Emerging Markets, pages 21-76 National Bureau of Economic Research, Inc.
    2. Daniel Covitz & Nellie Liang & Tobias Adrian, 2015. "Financial Stability Monitoring," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 357-395, December.
    3. Antonin Bergeaud & Gilbert Cette & Rémy Lecat, 2016. "Productivity Trends in Advanced Countries between 1890 and 2012," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(3), pages 420-444, September.
    4. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2013. "When Credit Bites Back," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 3-28, December.
    5. Paul, Pascal, 2017. "Historical Patterns of Inequality and Productivity around Financial Crises," Working Paper Series 2017-23, Federal Reserve Bank of San Francisco.
    6. Òscar Jordà & Moritz Schularick & Alan M Taylor, 2011. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(2), pages 340-378, June.
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    Citations

    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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    Cited by:

    1. Galstyan, Vahagn & Herzberg, Valerie, 2018. "External Balance Sheet Risks in Ireland," Financial Stability Notes 09-18, Central Bank of Ireland.

    More about this item

    Keywords

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

    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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