'Real Time' Early Warning Indicators for Costly Asset Price Boom/Bust Cycles: A Role for Global Liquidity

52 Pages Posted: 9 Jul 2010 Last revised: 20 Nov 2010

See all articles by Lucia Alessi

Lucia Alessi

European Central Bank (ECB)

Carsten Detken

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: 2010

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 '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 type I and II errors 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

JEL Classification: E37, E44, E51

Suggested Citation

Alessi, Lucia and Detken, Carsten, 'Real Time' Early Warning Indicators for Costly Asset Price Boom/Bust Cycles: A Role for Global Liquidity (2010). Paolo Baffi Centre Research Paper No. 2010-70. Available at SSRN: https://ssrn.com/abstract=1636194 or http://dx.doi.org/10.2139/ssrn.1636194

Lucia Alessi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carsten Detken

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

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