Journal
EUROPEAN JOURNAL OF POLITICAL ECONOMY
Volume 27, Issue 3, Pages 520-533Publisher
ELSEVIER SCIENCE INC
DOI: 10.1016/j.ejpoleco.2011.01.003
Keywords
Early warning indicators; Signaling approach; Leaning against the wind; Asset price booms and busts; Global liquidity
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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. (C) 2011 Elsevier B.V. All rights reserved.
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