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Banking crises and recessions: what can leading indicators tell us?

  • Corder, Matthew


    (Monetary Policy Committee Unit, Bank of England)

  • Weale, Martin


    (Monetary Policy Committee Unit, Bank of England)

It is widely suggested that there is some relationship between banking crises and recessions. We assess whether there is evidence for interdependency between recessions and banking crises using both non-parametric tests and unconditional bivariate probit models and find strong evidence for interdependence. We then consider whether leading indicators can help predict banking crises and recessions and if these variables can explain the previously obvserved interdependence. Inclusion of exogenous variables means that the observed interdependence between banking crises and recessions disappears - indicating that the observed interdependence is a result of easily observable common causes rather than unobserved links.

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Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 33.

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Length: 26 pages
Date of creation: 01 Sep 2011
Date of revision:
Handle: RePEc:mpc:wpaper:0033
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  1. John H. Boyd & Pedro Gomis-Porqueras & Sungkyu Kwak & Bruce David Smith, 2014. "A User's Guide to Banking Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 800-892, November.
  2. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-61, April.
  3. Gourieroux, Christian & Monfort, Alain & Renault, Eric & Trognon, Alain, 1987. "Generalised residuals," Journal of Econometrics, Elsevier, vol. 34(1-2), pages 5-32.
  4. Andrea Cipollini & George Kapetanios, 2005. "Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis," Working Papers 538, Queen Mary University of London, School of Economics and Finance.
  5. Ray Barrell & E Philip Davis & Tatiana Fic & Dawn Holland & Simon Kirby & Iana Liadze, 2009. "Optimal Regulation of Bank Capital and Liquidity: How to Calibrate New International Standards," Occasional Papers 38, Financial Services Authority.
  6. Elisabetta Falcetti & Merxe Tudela, 2008. "What do Twins Share? A Joint Probit Estimation of Banking and Currency Crises," Economica, London School of Economics and Political Science, vol. 75(298), pages 199-221, 05.
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