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Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning

  • Andrew K. Rose
  • Mark M. Spiegel

This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a crosssection of 107 countries; we focus on national causes and consequences of the crisis, ignoring crosscountry "contagion" effects. Our model of the incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly-cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of "early warning" systems of potential crises, which must also predict their timing.

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Paper provided by Department of the Treasury, Ministry of the Economy and of Finance in its series Working Papers with number 6.

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Length: 51
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Handle: RePEc:itt:wpaper:wp2009-6
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  1. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Working Paper Series 1060, European Central Bank.
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  17. Reinhart, Carmen & Felton, Andrew, 2009. "The first global financial crisis of the 21st century: Part II, June-December, 2008," MPRA Paper 13604, University Library of Munich, Germany.
  18. Sophia Rabe-Hesketh & Anders Skrondal & Andrew Pickles, 2004. "GLLAMM Manual," U.C. Berkeley Division of Biostatistics Working Paper Series 1160, Berkeley Electronic Press.
  19. Andrea de Michelis, 2009. "Overcoming the Financial Crisis in the United States," OECD Economics Department Working Papers 669, OECD Publishing.
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