Economic resilience: The usefulness of early warning indicators in OECD countries

Mikkel Hermansen and Oliver Röhn ()

OECD Journal: Economic Studies, 2017, vol. 2016, issue 1, 9-35

Abstract: The global financial crisis and the high associated costs have revived the academic and policy interest in “early warning indicators” of crises. This paper provides empirical evidence on the usefulness of a new set of vulnerability indicators, proposed in a companion paper (Röhn et al., 2015), in predicting severe recessions and crises in OECD countries. To evaluate the usefulness of the indicators the signalling approach is employed, which takes into account policy makers’ preferences between missing crises and false alarms. Our empirical evidence shows that the majority of indicators would have helped to predict severe recessions in OECD economies between 1970 and 2014. In the domestic areas, indicators that measure asset market imbalances (real house and equity prices, house price-to-income and house price-to-rent ratios), perform consistently well both in and out-ofsample. Domestic credit related variables appear particularly useful in signalling upcoming banking crises and in predicting the global financial crisis out-of-sample. Indicators of global risks consistently outperform domestic indicators in terms of their usefulness, highlighting the importance of taking international developments into account when assessing a country’s vulnerabilities. The good performance of the global indicators is however subject to a caveat: they are particularly suited to pick up recessions that affect a large number of countries simultaneously, such as the global financial crisis in 2008/09. The results are broadly robust to different definitions of costly events, different forecasting horizons and different time and country samples. JEL classification: E32; E44; E51; F47 Keywords: Resilience, early warning indicators, vulnerabilities, imbalances, severe recessions, crises

JEL-codes: E32 E44 E51 F47 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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Working Paper: Economic resilience: The usefulness of early warning indicators in OECD countries (2015)
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