Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153473
Authors: 
Alessi, Lucia
Detken, Carsten
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1039
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 between 1970 and 2007. A signalling approach is used to predict asset price booms that have relatively serious real economy consequences. We use a loss function to rank the tested indicators given policy makers' relative preferences with respect to missed crises and false alarms. The paper analyzes the suitability of various indicators as well as the relative performance of financial versus real, global versus domestic and money versus credit based liquidity indicators. We find that global measures of liquidity are among the best performing indicators and display forecasting records, which provide useful information for policy makers interested in timely reactions to growing financial imbalances, as long as aversion against type I and type II errors is not too unbalanced. Furthermore, we explore out-of-sample whether the most recent wave of asset price booms (2005-2007) would be predicted to be followed by a serious economic downturn.
Subjects: 
Early Warning Indicators
Leaning Against the Wind
Signalling Approach
JEL: 
E37
E44
E51
Document Type: 
Working Paper

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