What Macroeconomic Conditions Lead Financial Crises?
31 Pages Posted: 20 Jun 2018 Last revised: 21 Feb 2019
Date Written: 2018-06-15
Research has suggested that a rapid pace of nonfinancial borrowing reliably precedes financial crises, placing the pace of debt growth at the center of frameworks for the deployment of macroprudential policies. I reconsider the role of asset-prices and current account deficits as leading indicators of financial crises. Run-ups in equity and house prices and a widening of the current account deficit have substantially larger (and more statistically-significant) effects than debt growth on the probability of a financial crisis in standard crisis-prediction models. The analysis highlights the value of graphs of predicted crisis probabilities in an assessment of predictors.
Keywords: Current account, Debt, Equity prices, Financial crisis, House prices
JEL Classification: G01, E44, F32
Suggested Citation: Suggested Citation