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Early warning indicator model of financial developments using an ordered logit

  • Reimers, Hans-Eggert

The recent financial crisis has demonstrated in an impressive way that boom/bust cycles can have devastating effects on the real economy. This paper aims at contributing to the literature on early warning indicator exercises for asset price development. Using a sample of 17 industrialised OECD countries and the euro area over the period 1969 Q1 - 2011 Q2, an asset price composite indicator incorporating developments in both stock and house price markets is constructed. The latter is then further developed in order to identify periods that can be characterised as asset price booms and busts. The subsequent empirical analysis is based on an ordered logit-type approach incorporating several monetary, financial and real variables. Following some statistical tests, credit aggregates, the interest rate spread together with the house price growth gap and stock price developments appear to be useful indicators for the prediction of asset price developments.

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Paper provided by Hochschule Wismar, Wismar Business School in its series Wismar Discussion Papers with number 06/2012.

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Date of creation: 2012
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Handle: RePEc:zbw:hswwdp:062012
Contact details of provider: Web page: http://www.wi.hs-wismar.de/

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  1. Lawrence J. Christiano & Terry J. Fitzgerald, 1999. "The Band pass filter," Working Paper 9906, Federal Reserve Bank of Cleveland.
    • Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, 05.
  2. repec:cup:cbooks:9780521199674 is not listed on IDEAS
  3. Bussière, Matthieu & Fratzscher, Marcel, 2002. "Towards a new early warning system of financial crises," Working Paper Series 0145, European Central Bank.
  4. Irene Andreou & Gilles Dufrénot & Alain Sand & Aleksandra Zdzienicka-Durand, 2007. "A forewarning indicator system for financial crises: the case of six Central and Eastern European countries," Working Papers 0709, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  5. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
  6. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
  7. Dieter Gerdesmeier & Hans‐Eggert Reimers & Barbara Roffia, 2010. "Asset Price Misalignments and the Role of Money and Credit," International Finance, Wiley Blackwell, vol. 13(3), pages 377-407, Winter.
  8. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
  9. Claudio Borio & Mathias Drehmann, 2009. "Assessing the risk of banking crises - revisited," BIS Quarterly Review, Bank for International Settlements, March.
  10. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  11. Jan Babecky & Tomas Havranek & Jakub Mateju & Marek Rusnak & Katerina Smidkova & Borek Vasicek, 2011. "Early Warning Indicators of Economic Crises: Evidence from a Panel of 40 Developed Countries," Working Papers 2011/08, Czech National Bank, Research Department.
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