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On policymakers’ loss functions and the evaluation of early warning systems: Comment

Lucia Alessi () and Carsten Detken

Economics Letters, 2014, vol. 124, issue 3, 338-340

Abstract: Sarlin (2013) suggests that if a loss function approach is chosen to derive the optimal threshold for financial crisis early warning indicators, the loss function specification should explicitly take into account the unconditional sample crisis probability. In this comment we argue that this approach is not robust to small perturbations of the preference parameter and is not easy to use for policy purposes. We suggest therefore to continue using a simpler loss function specification.

Keywords: Early warning systems; Policymakers’ preferences; Policymakers’ loss function (search for similar items in EconPapers)
JEL-codes: E58 E61 G01 (search for similar items in EconPapers)
Date: 2014
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