Banking, Debt and Currency Crises: Early Warning Indicators for Developed Countries

45 Pages Posted: 22 Oct 2012

See all articles by Jan Babecký

Jan Babecký

Czech National Bank (CNB)

Tomas Havranek

Charles University in Prague; Centre for Economic Policy Research (CEPR)

Jakub Mateju

Charles University in Prague - CERGE-EI; Czech National Bank (CNB)

Marek Rusnák

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Katerina Smidkova

Czech National Bank (Deceased); Charles University - Economics Department (Deceased)

Borek Vasicek

Czech National Bank (CNB); European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Date Written: October 17, 2012

Abstract

We construct and explore a new quarterly dataset covering crisis episodes in 40 developed countries over 1970–2010. First, we examine stylized facts of banking, debt, and currency crises. Banking turmoil was most frequent in developed economies. Using panel vector autoregression, we confirm that currency and debt crises are typically preceded by banking crises, but not vice versa. Banking crises are also the most costly in terms of the overall output loss, and output takes about six years to recover. Second, we try to identify early warning indicators of crises specific to developed economies, accounting for model uncertainty by means of Bayesian model averaging. Our results suggest that onsets of banking and currency crises tend to be preceded by booms in economic activity. In particular, we find that growth of domestic private credit, increasing FDI inflows, rising money market rates as well as increasing world GDP and inflation were common leading indicators of banking crises. Currency crisis onsets were typically preceded by rising money market rates, but also by worsening government balances and falling central bank reserves. Early warning indicators of debt crisis are difficult to uncover due to the low occurrence of such episodes in our dataset. Finally, employing a signaling approach we show that using a composite early warning index increases the usefulness of the model when compared to using the best single indicator (domestic private credit).

Keywords: Early warning indicators, Bayesian model averaging, macro-prudential policies

JEL Classification: C33, E44, E58, F47, G01

Suggested Citation

Babecky, Jan and Havranek, Tomas and Mateju, Jakub and Rusnák, Marek and Smidkova, Katerina and Vasicek, Borek, Banking, Debt and Currency Crises: Early Warning Indicators for Developed Countries (October 17, 2012). ECB Working Paper No. 1485, Available at SSRN: https://ssrn.com/abstract=2162901

Jan Babecky (Contact Author)

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Tomas Havranek

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jakub Mateju

Charles University in Prague - CERGE-EI ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Czech National Bank (CNB)

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Marek Rusnák

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Katerina Smidkova

Czech National Bank (Deceased)

Charles University - Economics Department (Deceased)

Borek Vasicek

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

BU-1 05/190
Brussels, Bruxelles B-1049
Belgium

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