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Leading indicators of crisis incidence: evidence from developed countries

Author

Listed:
  • Babecký, Jan
  • Havránek, Tomáš
  • Matĕjů, Jakub
  • Rusnák, Marek
  • Šmídková, Kateřina
  • Vašíček, Bořek
Abstract
We search for early warning indicators that could indicate important risks in developed economies. We therefore examine which indicators are most useful in explaining costly macroeconomic developments following the occurrence of economic crises in EU and OECD countries between 1970 and 2010. To define our dependent variable, we bring together a (continuous) measure of crisis incidence, which combines the output and employment loss and the fiscal deficit into an index of real costs, with a (discrete) database of crisis occurrence. In contrast to recent studies, we explicitly take into account model uncertainty in two steps. First, for each potential leading indicator, we select the relevant prediction horizon by using panel vector autoregression. Second, we identify the most useful leading indicators with Bayesian model averaging. Our results suggest that domestic housing prices, share prices, and credit growth, and some global variables, such as private credit, are risk factors worth monitoring in developed economies. JEL Classification: C33, E44, E58, F47, G01

Suggested Citation

  • Babecký, Jan & Havránek, Tomáš & Matĕjů, Jakub & Rusnák, Marek & Šmídková, Kateřina & Vašíček, Bořek, 2012. "Leading indicators of crisis incidence: evidence from developed countries," Working Paper Series 1486, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20121486
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    More about this item

    Keywords

    Bayesian model averaging; early warning indicators; Macro-Prudential Policies;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises

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