Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154243
Authors: 
Joy, Mark
Rusnák, Marek
Šmídková, Kateřina
Vašíček, Bořek
Year of Publication: 
2015
Series/Report no.: 
ECB Working Paper No. 1810
Abstract: 
We identify a set of “rules of thumb” that characterise economic, financial and structural conditions preceding the onset of banking and currency crises in 36 advanced economies over 1970–2010. We use the Classification and Regression Tree methodology (CART) and its Random Forest (RF) extension, which permits the detection of key variables driving binary crisis outcomes, allows for interactions among key variables and determines critical tipping points. We distinguish between basic country conditions, country structural characteristics and international developments. We find that crises are more varied than they are similar. For banking crises we find that low net interest rate spreads in the banking sector and a shallow or inverted yield curve are their most important forerunners in the short term, whereas in the longer term it is high house price inflation. For currency crises, high domestic short-term rates coupled with overvalued exchange rates are the most powerful short-term predictors. We find that both country structural characteristics and international developments are relevant banking crisis predictors. Currency crises, however, seem to be driven more by country idiosyncratic, short-term developments. We find that some variables, such as the domestic credit gap, provide important unconditional signals, but it is difficult to use them as conditional signals and, more importantly, to find relevant threshold values.
Subjects: 
Banking crises
binary classification tree
currency crises
early warning indicators
JEL: 
C14
E44
F37
F47
G01
ISBN: 
978-92-899-1623-3
Document Type: 
Working Paper

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