Early Warning Indicators of Crisis Incidence: Evidence from a Panel of 40 Developed Countries

Jan Babecký, Tomas Havranek, Jakub Matìjù, Marek Rusnák, Katerina Smidkova and Boøek Vašíèek ()
Additional contact information
Jakub Matìjù: Czech National Bank, http://www.cnb.cz/
Boøek Vašíèek: Czech National Bank, http://www.cnb.cz/
Authors registered in the RePEc Author Service: Bořek Vašíček () and Jakub Matějů

No 2011/36, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: We provide a critical review of the literature on early warning indicators of economics crises and propose methods to overcome several pitfalls of the previous contributions. We use a quarterly panel of 40 EU and OECD countries for the period 1970–2010. As the response variable, we construct a continuous index of crisis incidence capturing the real costs for the economy. As the potential warning indicators, we evaluate a wide range of variables, selected according to the previous literature and our own considerations. For each potential indicator we determine the optimal lead employing panel vector autoregression, then we select useful indicators employing Bayesian model averaging. We re-estimate the resulting specification by system GMM to account for potential endogeneity of some indicators. Subsequently, to allow for country heterogeneity, we evaluate the random coefficients estimator and illustrate the stability among endogenous clusters. Our results suggest that global variables rank among the most useful early warning indicators. In addition, housing prices emerge consistently as an important domestic source of risk.

Keywords: Early warning indicators; Bayesian model averaging; panel VAR; dynamic panel; macro-prudential policies. (search for similar items in EconPapers)
JEL-codes: C33 E44 E58 F47 G01 (search for similar items in EconPapers)
Pages: 36
Date: 2011-11, Revised 2011-11
New Economics Papers: this item is included in nep-cba and nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Early Warning Indicators of Economic Crises: Evidence from a Panel of 40 Developed Countries (2011)
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