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

65 Pages Posted: 23 Nov 2021

See all articles by Kristina Bluwstein

Kristina Bluwstein

Bank of England

Marcus Buckmann

Bank of England

Andreas Joseph

Bank of England

Sujit Kapadia

Bank of England; European Central Bank (ECB)

Özgür Simsek

University of Bath

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2021

Abstract

We develop early warning models for financial crisis prediction by applying machine learning techniques to macrofinancial data for 17 countries over 1870–2016. Most nonlin-ear machine learning models 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 nonlinear relationships between the predic-tors 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: credit growth, machine learning, Shapley values, yield curve, financial crises, financial stability

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

Suggested Citation

Bluwstein, Kristina and Buckmann, Marcus and Joseph, Andreas and Kapadia, Sujit and Kapadia, Sujit and Simsek, Özgür, Credit Growth, the Yield Curve and Financial Crisis Prediction: Evidence from a Machine Learning Approach (November 1, 2021). ECB Working Paper No. 2021/2614, Available at SSRN: https://ssrn.com/abstract=3969562 or http://dx.doi.org/10.2139/ssrn.3969562

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

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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