Credit Growth, the Yield Curve and Financial Crisis Prediction: Evidence from a Machine Learning Approach

65 Pages Posted: 17 Jan 2020

See all articles by Kristina Bluwstein

Kristina Bluwstein

Bank of England

Marcus Buckmann

Bank of England

Andreas Joseph

Bank of England

Miao Kang

Bank of England

Sujit Kapadia

European Central Bank (ECB); Bank of England

Özgür Simsek

University of Bath

Date Written: January 10, 2020

Abstract

We develop early warning models for financial crisis prediction using machine learning techniques on macrofinancial data for 17 countries over 1870–2016. Machine learning models mostly outperform logistic regression in out-of-sample predictions and forecasting. We identify economic drivers of our machine learning models using a novel framework based on Shapley values, uncovering non-linear relationships between the predictors and crisis risk. Throughout, the most important predictors are credit growth and the slope of the yield curve, both domestically and globally. A flat or inverted yield curve is of most concern when nominal interest rates are low and credit growth is high.

Keywords: machine learning, financial crisis, financial stability, credit growth, yield curve, Shapley values, out-of-sample prediction

JEL Classification: C40, C53, E44, F30, G01

Suggested Citation

Bluwstein, Kristina and Buckmann, Marcus and Joseph, Andreas and Kang, Miao and Kapadia, Sujit and Simsek, Özgür, Credit Growth, the Yield Curve and Financial Crisis Prediction: Evidence from a Machine Learning Approach (January 10, 2020). Bank of England Working Paper No. 848, January 2020, Available at SSRN: https://ssrn.com/abstract=3520659 or http://dx.doi.org/10.2139/ssrn.3520659

Kristina Bluwstein (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Marcus Buckmann

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Andreas Joseph

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Miao Kang

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Sujit Kapadia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
020-7601-5507 (Phone)

Özgür Simsek

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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