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Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity

Lucia Alessi () and Carsten Detken

European Journal of Political Economy, 2011, vol. 27, issue 3, 520-533

Abstract: We test the performance of a host of real and financial variables as early warning indicators for costly aggregate asset price boom/bust cycles, using data for 18 OECD countries. A quasi real time signaling approach is used to predict asset price booms that have serious real economy consequences. We use a loss function to rank the indicators given policy makers' relative preferences with respect to missed crises and false alarms and suggest a new measure for assessing the usefulness of indicators. Global measures of liquidity, in particular a global private credit gap, are the best performing indicators and display forecasting records, which are informative for policy makers interested in timely reactions to growing financial imbalances.

Keywords: Early; warning; indicators; Signaling; approach; Leaning; against; the; wind; Asset; price; booms; and; busts; Global; liquidity (search for similar items in EconPapers)
Date: 2011
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