Banking and Currency Crises: Differential Diagnostics for Developed Countries

Mark Joy, Marek Rusnák, Katerina Smidkova and Bořek Vašíček ()

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: We identify a set of "rules of thumb" that characterise economic, financial and structural conditions preceding the onset of banking and currency crises in 36 advanced economies over 1970–2010. We use the Classification and Regression Tree methodology (CART) and its Random Forest (RF) extension, which permits the detection of key variables driving binary crisis outcomes, allows for interactions among key variables and determines critical tipping points. We distinguish between basic country conditions, country structural characteristics and international developments. We find that crises are more varied than they are similar. For banking crises we find that low net interest rate spreads in the banking sector and a shallow or inverted yield curve are their most important forerunners in the short term, whereas in the longer term it is high house price inflation. For currency crises, high domestic short-term rates coupled with overvalued exchange rates are the most powerful short-term predictors. We find that both country structural characteristics and international developments are relevant banking crisis predictors. Currency crises, however, seem to be driven more by country idiosyncratic, short-term developments. We find that some variables, such as the domestic credit gap, provide important unconditional signals, but it is difficult to use them as conditional signals and, more importantly, to find relevant threshold values.

Keywords: Banking crises; binary classification tree; currency crises; early warning indicators (search for similar items in EconPapers)
JEL-codes: C14 E44 F37 F47 G01 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Banking and Currency Crises: Differential Diagnostics for Developed Countries (2017)
Working Paper: Banking and currency crises: differential diagnostics for developed countries (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2014/16

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