Leading Indicators of Crisis Incidence: Evidence from Developed Countries

30 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 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.

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

JEL Classification: C33, E44, E58, F47

Suggested Citation

Babecky, Jan and Havranek, Tomas and Mateju, Jakub and Rusnák, Marek and Smidkova, Katerina and Vasicek, Borek, Leading Indicators of Crisis Incidence: Evidence from Developed Countries (October 17, 2012). ECB Working Paper No. 1486, Available at SSRN: https://ssrn.com/abstract=2162940

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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