The Risk of Financial Crises: Does it Involve Real or Financial Factors?

36 Pages Posted: 8 Nov 2014

See all articles by Karolin Kirschenmann

Karolin Kirschenmann

Centre for European Economic Research (ZEW)

Tuomas Malinen

HECER, University of Helsinki

Henri Nyberg

University of Helsinki; University of Turku

Date Written: November 7, 2014

Abstract

The recent financial crisis appears to point to credit booms as the most important driver of crises. However, could macroeconomic factors such as income inequality potentially be the real root cause of financial crises? We explore a broad variety of financial and macroeconomic variables and employ a general-to-specific model selection process to find the most reliable predictors of financial crises in 14 developed countries over a period of more than 100 years. Our in-sample results indicate that income inequality has predictive power in addition to and above loan growth and several other financial variables. Out-of-sample forecasts for individual predictors in different time periods show that their predictive power tends to vary considerably over time, but income inequality yields individual predictive power in each forecasting period.

Keywords: bank loans, income inequality, fixed effects logit, out-of-sample

JEL Classification: C33, C53, E44, G01

Suggested Citation

Kirschenmann, Karolin and Malinen, Tuomas and Nyberg, Henri, The Risk of Financial Crises: Does it Involve Real or Financial Factors? (November 7, 2014). Available at SSRN: https://ssrn.com/abstract=2520434 or http://dx.doi.org/10.2139/ssrn.2520434

Karolin Kirschenmann

Centre for European Economic Research (ZEW) ( email )

Germany
+496211235351 (Phone)

Tuomas Malinen (Contact Author)

HECER, University of Helsinki ( email )

Helsinki, 00014
Finland

Henri Nyberg

University of Helsinki ( email )

University of Helsinki
Helsinki, FIN-00014
Finland

University of Turku ( email )

Turku, 20014
Finland

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