international evidence on output inflation tradeoffs a bootstrap analysis abstract a bootstrap analysis of existing data on international output inflation tradeoffs is performed in contrast to some previous empirical work the results of the bootstrap analysis strongly support lucas 1973 rational expectations model of the natural rate hypothesis

does economic recession reduce material use empirical evidence based on 157 economies worldwide abstract the research on economic recession has been more focused on the interactions between macroeconomic and financial variables however whether material use has been affected during the recession period has remained under explored in order to fill up this gap this study investigates the relationship between material use and economic recession as well as other socio economic drivers by using the material flow analysis and the system generalized method of moments for 157 economies worldwide during 1980 2011 results show that economic recession poses significant and negative impact on domestic material consumption at 1 level illustrating its role as a determinant factor on material mitigation by dividing the research sample into extractive and non extractive economies as well as high mid and low income groups we again confirmed the significant negative correlations as expected no significant sign is found between recession and physical trade balance besides other drivers such as population gross domestic production gdp per capita and technological variables also exert marked effects at different situations this research work provides an empirical study on how recession and other factors affect material use at various scenarios which have essential implications for understanding material flow dynamics in different economic cycles

balance of payment crises in emerging markets how early were the early warning signals although many papers have already proposed empirical models of currency crises the timing of such crises has received relatively little attention so far most papers use indeed a static specification and impose the same lag structure across all explanatory variables this by construction prevents from specifically timing the crisis signals sent by the leading indicators the objective here is to fill this gap by considering a set of dynamic discrete choice models the first contribution is to identify how early in advance each explanatory variable sends a warning signal some indicators are found to signal a crisis in the very short run while others signal a crisis at more distant horizons the second contribution is to show that state dependence matters albeit mostly in the short run the results have important implications for crisis prevention in terms of the timeliness and usefulness of the envisaged policy response

boom and bust cycles external imbalances and the real exchange rate when the current account balance and net capital outflows do not exactly offset each other international payment flows arise payment flows into a country push the real exchange rate up payment outflows push it down this article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom and bust cycles it shows that during such episodes capital inflows first exceed the deficit on current account strengthening the currency later on when the return on domestic capital reverts to its normal level the current account recovers yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article s theoretical predictions

capital controls capital flow contractions and macroeconomic vulnerability abstract in this paper i analyze whether restrictions to capital mobility reduce vulnerability to external shocks more specifically i ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows i use three new indexes on the degree of international financial integration and a large multi country data set for 1970 2004 to estimate a series of random effect probit equations i find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant but very small having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction the benefits of flexible rates increase as the degree of capital mobility increases a higher current account deficit increases the probability of a capital flow contraction while a higher ratio of fdi to gdp reduces that probability

inflation dynamics and the output inflation trade off international panel data evidence we explore the impact of inflation and its variability on the output inflation trade off using a unified single step approach in a panel data context a limitation of earlier empirical approaches is that they focus on either cross country or country by country time series analyses this paper employs a dynamic heterogeneous panel data specification and uses an all encompassing estimation framework that accounts for parameter heterogeneity cross sectional dependence dynamics and non stationarity our sample covers 60 countries from 1970 to 2010 while inflation variability reduces the trade off for specific periods and country groups an unambiguous and more pronounced negative relation emerges between the inflation rate and the responsiveness of real output to nominal shocks the findings are in line with the new keynesian view of a negative association between the rate of inflation and the output inflation trade off as well as with the observed flattening of the phillips curve over the past decades

the speculative attack on the peso and the real exchange rate argentina 1979 1981 abstract this article applies a speculative attack model to argentina during its pre announced exchange rate system from january 1 1979 to june 30 1981 the model attempts to verify a rule whereby if domestic credit growth exceeds the rate of currency depreciation two things occur first the domestic price of non traded goods rises relative to the price of traded goods second foreign reserves decline until a point when a sudden speculative attack depletes remaining reserves causes a precipitous fall in the relative price of non tradables and forces the country onto a floating exchange rate regime in some important respects the model captures the argentinian experience yet in other respects if fails to do so

crises and exchange rate regimes time to break down the bipolar view we revisit the link between crises and exchange rate regimes err using a panel of 90 developed and developing countries over the period 1980 2009 we find that corner err are not more prone to crises compared to intermediate err this finding holds for different types of crises banking currency and debt and is robust to a wide set of alternative specifications consequently we clearly break down the traditional bipolar view countries that aim at preventing crisis episodes should focus less on the choice of the err and instead implement sound structural macroeconomic policies

currency misalignments and growth a new look using nonlinear panel data methods the aim of this article is to investigate the link between currency misalignments and economic growth relying on panel cointegration techniques we calculate real exchange rate rer misalignments as deviations of actual rers from their equilibrium values for a set of advanced and emerging economies estimating panel smooth transition regression pstr models we show that rer misalignments have a differentiated impact on economic growth depending on their sign whereas overvaluations negatively affect economic growth rer undervaluations significantly enhance it this result indicates that undervaluations may drive the exchange rate to a level that encourages exports and promotes growth

differences in social capital between 54 western european regions beugelsdijk s and van schaik t 2005 differences in social capital between 54 western european regions regional studies 39 1053 1064 based on the extant literature a newly developed index measuring social capital at the regional level in europe is presented it is shown that there are large regional differences on this social capital index it was tested if higher scores on this social capital index correlate with higher levels of economic development and regional economic growth in 54 western european regions though further research is required these preliminary results suggest a positive relationship exists between social capital and regional economic development the paper concludes with suggestions for future empirical research

demand variability supply shocks and the output inflation tradeoff this paper examines the shift in the relation between the inflation rate and the rate of growth of real output which has occurred in the united states over the past three decades and attempts to assess the relative importance of three possible lines of explanation a the new classical view of the output inflation tradeoff initially specified by lucas b the effect of supply side shocks such as energy prices c the effect of inflation variability on the natural rate of real output as hypothesized by milton friedman the paper concludes that b and c seem to have played a significant role in the observed shift from a positive to a negative correlation between the rate of inflation and the rate of real output growth but that a did not this abstract was borrowed from another version of this item

a new approach to modeling early warning systems for currency crises can a machine learning fuzzy expert system predict the currency crises effectively abstract this paper presents a hybrid causal model for predicting the occurrence of currency crises by using the neuro fuzzy modeling approach the model integrates the learning ability of the neural network with the inference mechanism of fuzzy logic the empirical results show that the proposed neuro fuzzy model leads to a better prediction of crisis significantly the model can also construct a reliable causal relationship among the variables through the obtained knowledge base compared to neural network and the traditionally used techniques such as logit the proposed model can thus lead to a somewhat more prescriptive modeling approach based on determinate causal mechanisms towards finding ways to prevent currency crises

can leading indicators assess country vulnerability evidence from the 2008 09 global financial crisis abstract we investigate whether leading indicators can help explain the cross country incidence of the 2008 09 financial crisis rather than looking for indicators with specific relevance to the recent crisis the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators our motivation is to address suspicions that indicators found to be useful predictors in one round of crises are typically not useful to predict the next round the review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and episodes in the past for the 2008 09 crisis we use six different variables to measure crisis incidence drops in gdp and industrial production currency depreciation stock market performance reserve losses and participation in an imf program we find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008 09 crisis in line with the conclusions of the pre 2008 literature in addition to reserves recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis we define the period of the global financial shock as running from late 2008 to early 2009 which probably explains why we find stronger results than earlier papers such as obstfeld et al 2009 2010 and rose and spiegel 2009a b 2010 2011 which use annual data

a cautious note on the use of panel models to predict financial crises abstract panel data framework has often been used to build early warning systems for financial crises this paper questions the implicit assumption that crises are homogenously caused by identical factors it suggests a preliminary step aiming at forming optimal country clusters

financial contagion and international portfolio flows financial contagion is an issue of interest to policymakers and portfolio managers in the presence of contagion the benefits of geographical diversification may be overstated contagion is defined independently of changes in macroeconomic fundamentals it corresponds to a situation in which shocks in one country spread to another country in a significantly more pronounced manner than during quiet times in the study reported here i attempted to measure contagion from daily cross border portfolio flows using data from state street bank and trust company i constructed three indexes for 1996 through 2000 i found little statistical evidence of contagion but the weighted index that measured the contagiousness of flows reached its four year low in august 1998 suggesting that the russian crisis was characterized by both contagion and large aggregate outflows i also found that contagion appears to be regional and that the developed countries seem to be sheltered from contagion

designing an early warning system for currency crises an empirical treatment this article investigates the predictive power of qualitative response models that can serve as the basis for an early warning system for currency crises it employs a signals framework that monitors the behaviour of key economic variables and issues a warning when their values exceed certain critical levels the analysis is carried out for a parsimonious specification with high frequency data taking egypt as a case study it is shown that this class of probability models captures to a good extent the turbulence in the foreign exchange market and the onset of crises

monetary policy and exchange market pressure evidence from sub saharan africa the purpose of this study was to assess the impact of monetary policy on foreign exchange market pressure emp in developing country contexts for some selected countries in sub saharan africa ssa and to measure the ability of monetary policy to significantly address currency pressures that arise from trading on the global market this study was motivated by the fact that most of the ssa countries are developing economies that have negative net export positions and stand to lose significantly from consistently deteriorating foreign exchange position the study therefore employs a dynamic panel model to test the hypothesis that a tighter monetary policy stance lends strength to a currency and vice versa using 20 ssa economies for the period from 1991 to 2010 this study finds a negative and significant relationship between monetary policy and emp implying an easing of emp in the face of contractionary monetary policy the findings also point to significant relations between aggregate output levels o

crisis in the eye of the beholder economic crisis and partisan politics in latin american and east european international monetary fund programs this article analyzes the interaction between economic crises and partisan politics during international monetary fund program initiation in latin america in the 1980s and eastern europe in the 1990s the author argues that economic crises are at least in part in the eye of the beholder and therefore policy responses reflect the interaction between crisis intensity and the government s partisan interpretation of the crisis which in turn depends on the nature of the economic crisis and its broader regional and international environment using cross country statistical evidence from the two regions the article shows that certain types of crises such as liquidity shortfalls elicit similar responses across the ideological spectrum and regional contexts by contrast debt repayment and domestic crises are more prone to divergent ideological interpretations but the extent of partisan divergence is context sensitive in that it occurred during the latin american debt crisis but not in the post communist tra

estimating the natural rate of unemployment and testing the natural rate hypothesis how should one measure the natural rate of unemployment this paper proposes a systems procedure as an alternative to nairu the natural rate is treated as an unobserved state variable in a system that includes measurement equations for the unemployment rate the rate of wage growth and the rate of inflation the model is derived from a version of the wage bargaining model of blanchard and embodies a version of the natural rate hypothesis the model is estimated by embedding the kalman filter within the full information maximum likelihood procedure for us data the estimated model implies substantial post war variation in the natural rate and a negative but weak effect of inflation surprises on unemployment copyright 1999 john wiley sons ltd

false prophet or genuine savior assessing the effects of economic openness on sustainable development 1980 99 while many herald globalization the increasing interconnectedness of national economies to be associated with rising standards of living across the globe others fear its effects on sustainability antiglobalization forces and environ mentalists view these developments as a threat to the welfare of future generations because of profligate and excessive current consumption this study is the first to estimate the effects of dependence on trade foreign direct investment fdi and an index of economic freedom on the world bank s measure of sustainability the gen uine savings rate which measures the rate at which investment in the total stock of manufactured human and natural capital exceeds its depreciation contrary to pessi mists fears our indicators of economic openness show positive effects on sustain ability results that are robust to sample size testing procedure and several alternative specifications the results support those who suggest that distorted economies tend to be both inefficient and damaging to future generations if increasing trade fdi and economic freedom are hallmarks of globalization then worries about its effects on future well being are misplaced

unravelling financial market linkages during crises an empirical model of multiple asset classes across countries is formulated in a latent factor framework a special feature of the model is that financial market linkages during periods of financial crises including spillover and contagion effects are formally specified the model also captures a range of common factors including global shocks country and market shocks and idiosyncratic shocks the framework is applied to modelling linkages between currency and equity markets during the east asian financial crisis of 1997 98 the results provide strong evidence that cross market links are important spillovers have a relatively larger effect on volatility than contagion but both are statistically significant

symposium on social capital introduction this symposium contains three papers that discuss aspects of social capital social capital has become a major focus of research in many social sciences its increased prominence in economics reflects a general increase in interest in questions that have traditionally been deemed sociological regardless of one s opinion of social capital per se this broadening of questions addressed within economics has been very salutary

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

the role of foreign currency debt in financial crises 1880 1913 versus 1972 1997 abstract we show that exposure to foreign currency debt does not necessarily increase the risk of having a financial crisis some countries do not suffer from financial fragility despite original sin before 1913 british offshoots and scandinavia afflicted with it avoided financial meltdowns today many advanced countries have original sin but few have had crises in both periods aggregate balance sheet mismatches are associated with a greater likelihood of a crisis the evidence suggests that foreign currency debt is dangerous when mis managed this is part of the difference between developed countries and emerging markets both of which borrow in foreign currency

does inequality lead to credit growth testing the rajan hypothesis using state level data this paper uses state level data to test the rajan hypothesis from his book fault lines that an increase in inequality can lead to a credit boom using dynamic heterogeneous panel estimation methods i e mg pmg dfe we find a significant positive long run relationship between inequality and real estate lending across u s states

assessing systemic risks and predicting systemic events abstract the paper develops a framework for assessing systemic risks and for predicting systemic events i e periods of extreme financial instability with potential real costs it contributes to the literature on the prediction of financial crises mainly in two ways first it uses a financial stress index for identifying the starting date of systemic financial crises second it uses discrete choice models that combine both domestic and global indicators of macro financial vulnerabilities to predict systemic financial crises the performance of the models is evaluated in a framework that takes into account policy maker s preferences between missing crises and issuing false alarms our analysis shows that combining indicators of domestic and global macro financial vulnerabilities substantially improves the models ability to forecast systemic financial crises our framework also displays a good out of sample performance in predicting the ongoing global financial crisis

impact of financial crises on poverty in developing world an empirical approach in this paper we adopt a cross country perspective to analyze the short term effects of currency banking and debt crises on poverty we employ multivariate fixed effects panel data analysis in order to examine whether and to what extent different types of financial crises impact the poverty headcount ratio and the poverty gap as measured by the world bank our findings suggest that out of the three categories of financial crises we identify it is currency crises that most significantly exacerbate both the incidence and depth of poverty in the short run we find evidence that banking crises are associated with an increase in the depth of poverty but not the incidence however this effect tends to be short lived while our analysis shows no direct effect of sovereign debt crises on short term poverty

predicting banking crises with artificial neural networks the role of nonlinearity and heterogeneity studies of the early warning systems ewss for banking crises usually rely on linear classifiers estimated with international datasets i construct an ews based on an artificial neural network ann model and i also account for regional heterogeneity in order to improve the generalization ability of ews models all of the banking crises in my test set are then predictable at a 24 month horizon using information from earlier crises for some countries estimation with a regional dataset significantly improves the predictions the ann outperforms the usual logit regression assessed by the area under the receiver operating characteristics curve

the circular relationship between inequality leverage and financial crises in this paper we put into perspective the recent literature which points to inequality as a possible cause of credit bubbles by reintegrating it into a more general analysis on the two way relationship between inequality and finance we focus more specifically on situations where high inequalities and widespread access to credit coexist and argue that even when institutions maintain more or less equal access to finance there may be a dynamic positive circular relationship between inequality and financial development however even if there is some evidence in the literature of a positive causal impact of inequality on credit this does not preclude other important cofounding factors the conclusions concerning the distributional impact of finance are more ambiguous a survey of the empirical literature highlights several issues that must be tackled first endogeneity reverse causality and coincidental factors are major concerns second the choice of consistent measurements for the key variables both credit and inequality has strong empirical implications and must be grounded on relevant theoretical channels third those circular dynamics have substantial policy implications for emerging economies since an increasing number face a joint increase in inequality and credit

currency crises and institutions abstract this study furthers recent literature on currency crises and institutions the main objective is to re evaluate the causes of currency crises by focusing on the role played by a broader array of institutional factors and crisis episodes than have previously been considered while at the same time controlling for economic factors our dataset consists of over 30 countries covering 13 institutional factors for the period 1984 2002 two questions are addressed they are 1 what mix of institutions may contribute to or set the stage for a currency crisis and 2 what mix of institutions may affect the depth of currency crises as measured by a decline in output our findings reveal that institutional as well as economic factors affect the probability of currency crises and that worse institutions are associated with bigger contractions in output during the crisis in general our strongest results regarding institutions show that corruption a de facto fixed exchange rate regime weak government stability and weak law and order increase the probability of a currency crisis we find mixed evidence that deposit insurance the removal of capital controls a lack of central bank independence financial liberalization and civil law increase the chance of crisis we find a similar set of factors worsens the contraction in output during a crisis except for deposit insurance which we find moderates the contraction in output

productivity effects of innovation stress and social relations innovation is a source of increasing productivity but also of stress psychological research shows that individual productivity increases and then decreases as stress levels increase agents stress levels are determined by their own coping ability and by positive and negative spillovers to their social contacts we model stress and inter agent dynamics identifying the relationships between innovation stress and productivity we characterize conditions under which multiple equilibria in stress levels and growth rates exist and under which the dynamics exhibit hysteresis high rates of innovation can result in high stress equilibrium and have a negative effect on economic growth

alert at maradi preventing food crises by using price signals national early warning systems of sahelian countries are mainly based on biophysics models to predict agricultural production shortages and prevent food crisis the objective of this paper is to show that cereal market prices also bring useful information on future food availability that could complete current early warning disposals indeed at any point in time prices are informative not only on the state of present food availability but also on agents expectations about future availability the research is based on the exploitation of the statistical properties of price series it aims at detecting movements in the prices trend signalling a coming crisis we first identify markets playing a leading role in price formation at the national and regional level through the estimation of var models the second step consists in identifying crisis periods and then the price shocks characterises during the period which precedes a crisis this analysis leads to the identification of early warning indicators whose relevance is tested using panel data qualitative choice models the data set encompasses 50 markets belonging to three countries mali burkina faso and niger over the period 1990 2008 the results show that past price shocks on a few number of leading marketplaces can help preventing coming crises

who recovers first banking crises resolution in developing countries this article evaluates conditions that facilitate banking crises resolution using data from 67 developing countries from 1980 to 1995 in particular the author examines explanatory variables under three categories external macroeconomic constraints the role of the international monetary fund imf and domestic political conditions the principal results of the analyses are twofold first imf credits decrease the probability of resolving banking crises this result holds controlling for potentially confounding variables and in a test for endogeneity second the decisiveness of a political regime significantly influences the probability of emerging from systemic distress specifically in cases of moderate banking distress decisiveness facilitates resolution of crisis but during periods of severe crises less decisive governments i e governments constrained by accountability groups are likely to recover more quickly than are those with less constrained executives

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

monetary accommodation of supply shocks under rational expectations in dealing with the expectationists arguments i will divide them somewhat artificially into two groups arguments in the first group which i call present disaster arguments allege that econometric models err by understating the reaction of inflationary expectations for example it is claimed that a policy of monetary accommodation would increase inflationary expectations shift the short run phillips curve upward and defeat the purpose of the expansionary policy arguments in the second group which i call future disaster arguments are more subtle but also more elusive the idea is that by informing private agents that it will accommodate supply shocks in the future the monetary authority would exacerbate the downward rigidity of wages and prices thus making it more difficult to deal with future supply shocks such arguments are cases of the lucas 12 econometric policy critique since they suggest that policy changes will cause parameter shifts neither of these arguments is implausible on its face the problem is that it is hard to know how to evaluate them until they are formalized in theoretical models and then tested empirically this paper takes one small step in that direction by augmenting two popular macro models with rational expectations so that they are capable of dealing with supply shocks and then examining both the present and future disaster arguments in the context of each this abstract was borrowed from another version of this item

non core bank liabilities and financial vulnerability a lending boom is reflected in the composition of bank liabilities when traditional retail deposits core liabilities cannot keep pace with asset growth and banks turn to other funding sources non core liabilities to finance their lending we formulate a model of credit supply as the flip side of a credit risk model where a large stock of non core liabilities serves as an indicator of the erosion of risk premiums and hence of vulnerability to a crisis we find supporting empirical evidence in a panel probit study of emerging and developing economies

currency crashes in emerging markets an empirical treatment we use a panel of annual data for over 100 developing countries from 1971 through 1992 to characterize currency crashes we define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation we examine the composition of the debt as well as its level and a variety of other macroeconomic factors external and foreign crashes tend to occur when output growth is low the growth of domestic credit is high and the level of foreign interest rates are high a low ratio of fdi to debt is consistently associated with a high likelihood of a crash

forecasting the fragility of the banking and insurance sectors linkages between banks and insurance companies are important when forecasting the fragility of the banking and insurance sectors we propose a novel empirical framework that allows us to estimate unobserved linkages in panel data sets that contain observed regressors we find that taking unobserved common factors into account reduces the root mean square forecasts error of firm specific forecasts by up to 9 of system forecasts by up to 14 and by up to 39 for systemic forecasts of more distressed firms relative to a model based on observed variables only estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period

in search of the natural rate of unemployment abstract the natural rate of unemployment can be measured as the time varying steady state of a structural vector autoregression for post war us data the natural rate implied by this approach is more volatile than most previous estimates with its movements accounting for the bulk of the variation in the unemployment rate as well as substantial portions of the variation in aggregate output and inflation these movements in turn can be related to variables associated with labor market search theory including unemployment benefits labor productivity real wages and sectoral shifts in the labor market there is also a strong negative relationship between inflation and the corresponding measure of cyclical unemployment supporting the existence of a short run phillips curve

currency crises capital account liberalization and selection bias are countries with unregulated capital flows more vulnerable to currency crises efforts to answer this question properly must control for self selection bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises we employ a matching and propensity score methodology to address this issue in a panel analysis of developing countries our results suggest that after controlling for sample selection bias countries with liberalized capital accounts experience a lower likelihood of currency crises that is when two countries have the same likelihood of allowing free movement of capital based on historical evidence and a very similar set of economic and political characteristics and one country imposes controls and the other does not the country without controls has a lower likelihood of experiencing a currency crisis this result is at odds with the conventional wisdom and suggests that the benefits of capital market liberalization for external stability are substantial

financial indicators signaling correlation changes in sovereign bond markets abstract we use a smooth transition conditional correlation garch stcc garch model applied to the euro area monetary policy rates and sovereign yields of italy spain and germany at 5 year maturity to estimate the threshold level of the signals above which the sovereign bond market moves to a crisis regime we show that the threshold to a crisis regime for italy and spain is reached when i their 5 year sovereign yield spreads amount to about 90 basis points ii their 5 year cds spreads amount to about 155 basis points or iii the 5 year spread between the kreditanstalt fur wiederaufbau kfw bond and the german bund amounts to about 30 40 basis points using impulse responses we find that the stcc garch with the kfw bund spread has leading properties a feature corroborated by the fact that this indicator suggested a shift to a crisis regime already in august 2007 and has been signaling an improvement of the situation already in the autumn of 2012 an out of sample forecast of the stcc garch model is also provided which is both a novelty and a further robustness check for the stability of the model

did the recent housing boom signal the global financial crisis author affiliation david m kemme dmkemme memphis edusaktinil roy saktinil athabascau ca1 introductionshiller 2005 pp xiii iv argued that the rapid surges of real home prices in the united states and other countries in the late 1990s and early 2000s signaled the potential for widespread personal and institutional bankruptcies and a worldwide recession probably as deep and lasting as japan s lost decade 1 of course as we know today this was one of few highly accurate predictions of events that unfolded after the u s subprime market collapse of 2007 2008 2 given the prevailing regulatory conditions and implied financial liberalization the housing boom was a bubble phenomenon driven primarily by the over optimism of a new era in which home prices would only rise historically financial booms around the world which were similarly associated with wishful thinking of unending future increases in asset prices also imploded and led to recession in similar ways indeed thorough observation of these historical episodes and of the contemporary sudden changes in the housing markets was the basis of shiller s 2005 pp xiii iv chapters 2 7 prescience regarding the potential magnitude and impact of the current turmoil nevertheless the emerging literature on the current episode has not yet provided an empirical framework with which to confirm these observations and prescience could the insights that followed from historical and contemporary evidence but that were not so obvious to most researchers policy makers and market participants be produced with appropriate data and standard statistical procedures specifically following shiller s 2005 pp xiii iv chapters 2 7 observations and insights shouldn t the rapid rise since 1998 of real house prices alone provide enough information to foretell the current state of the housing and banking sectors and the implications for the whole economy this article employs standard statistical models and examines this simple proposition we follow a two step procedure answering two different but related questions first we provide a statistical confirmation of the observation made by shiller 2005 chapter 2 2008 chapter 2 that the drastic increase in real house prices in the united states since 1998 was mainly unexplained by changes in economic fundamentals such as income population building costs and long term interest rates we find that although these fundamentals largely explain real house prices in the united states over the period from 1950 through 1997 our out of sample forecasts indicate that the same fundamentals fail to account for a sudden large rise of real house prices during 1998 2005 next in line with shiller s observation 2005 chapter 7 that similar historical financial booms imploded in similar ways we examine the predictability of the recent global crisis based on historical house price data associated with other post war bank centered crisis episodes we fit panel probit and logit models to a cross country panel of data for real house prices for advanced economies that experienced banking crises in the post war period and conclude that a housing boom is a good predictor of financial crisis we then ask if the recent global crisis specifically the systemic banking crises in the united states britain ireland and spain which also had prior housing bubbles can be predicted out of sample the finding is that this is indeed possible credible alarms can be generated for the banking crises of all four countries three years in advance in section 2 we present shiller s 2005 chapter 2 argument for an unsustainable housing boom in the united states during 1998 2005 and substantiate it statistically in section 3 we investigate the observation by shiller 2005 chapter 7 inter alia that prior speculative bubbles are quite common to financial crises around the world so that the housing booms in the united states and other countries in the early 2000s signaled a global recession

temporary controls on capital inflows abstract during the past decade a number of countries imposed capital controls that had two distinguishing features they were asymmetric in that they were designed principally to discourage capital inflows and they were temporary this paper studies formally the consequences of these policies calibrates their potential effectiveness and assesses their welfare implications in an environment in which the level of capital inflows can be sub optimal in addition motivated by the fact that these types of controls have often been left in place after the dissipation of the shock that lead to the controls being implemented the paper evaluates the welfare cost of procrastination in removing these types of controls

together or apart the relationship between currency and banking crises abstract the purpose of this study is to provide empirical evidence on the links between currency and banking crises panel data probit and bivariate probit models are estimated to a sample of 21 developed and developing countries having monthly observations between the years 1985 and 2010 the findings indicate that banking crises precede currency crises and vice versa currency crises also indirectly influence future banking crises probability through external shocks liberalized financial markets or highly leveraged banking sectors the study also finds evidence of contemporaneous correlation between the two crises the results not only confirm the theoretical links between banking and currency crises but also underline the importance of higher frequency data in analyzing the relationship between various financial crises

a primer on financial contagion abstract this paper presents a theoretical framework to highlight possible channels for the international transmission of financial shocks we first review the different definitions and measures of contagion adopted by the literature we then use a simple multi country asset pricing model to classify the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy in particular the model shows how crises can be transmitted across countries without assuming ad hoc portfolio management rules or market imperfections finally tracking our classification we survey the results of the empirical literature on contagion

currency crises are they all the same abstract the plethora of currency crises around the world has fueled many theories on the causes of speculative attacks the first generation models focus on fiscal problems while the second generation models emphasize countercyclical policies and self fulfilling crises in the 1990s models pinpoint to financial excesses with the crisis of argentina in 2001 models of sovereign default have become popular again while the theoretical literature has emphasized variety the empirical literature has supported the one size fits all models this paper contributes to the empirical literature by assessing whether the crises of the last 30 years are of different varieties

explaining the transition between exchange rate regimes this paper studies the transition between exchange rate regimes using a markov chain model with time varying transition probabilities the probabilities are parameterized as nonlinear functions of variables suggested by the currency crisis and optimal currency area literature results using annual data indicate that inflation and to a lesser extent output growth and trade openness help explain the exchange rate regime transition dynamics

fiscal policy and the duration of financial crises financial systems across the world have all come under pressure due to the on going financial crisis one of the most often asked questions during a collapse is how long and how deep will the decline be as well as what policy initiatives can be employed to shorten the recession this study estimates a model of the duration of financial crises in an attempt to identify whether fiscal policy can reduce the time to recovery the results suggest that fiscal shocks which could provoke an overreaction on the part of markets tend to lengthen crisis duration significant nonlinear effects of government spending are also reported in relation to trade openness and financial openness

predicting financial crises the statistical significance of the signals approach abstract the signals approach as an early warning system has been fairly successful in detecting crises but it has so far failed to gain popularity in the scientific community because it cannot distinguish between randomly achieved in sample fit and true predictive power to overcome this obstacle we test the null hypothesis of no correlation between indicators and crisis probability in three applications of the signals approach to different crisis types to that end we propose bootstraps specifically tailored to the characteristics of the respective datasets we find 1 that previous applications of the signals approach yield economically meaningful results 2 that composite indicators aggregating information contained in individual indicators add value to the signals approach and 3 that indicators which are found to be significant in sample usually perform similarly well out of sample

towards a new early warning system of financial crises abstract this paper develops a new early warning system ews model based on a multinomial logit model for predicting financial crises it is shown that commonly used ews approaches which use binomial discrete dependent variable models are subject to what we call a post crisis bias this bias arises when no distinction is made between tranquil periods when economic fundamentals are largely sound and sustainable and crisis post crisis periods when economic variables go through an adjustment process before reaching a more sustainable level or growth path we show that applying a multinomial logit model which allows distinguishing between more than two states is a valid way of solving this problem and constitutes a substantial improvement in the ability to forecast financial crises the empirical results reveal that for a set of 20 open emerging markets for the period 1993 2001 the model would have correctly predicted a large majority of crises in emerging markets

cross country causes and consequences of the crisis an update abstract we update rose and spiegel forthcoming rose and spiegel 2010 and search for simple quantitative models of macroeconomic and financial indicators of the great recession of 2008 09 we use a cross country approach and examine a number of potential causes that have been found to be successful indicators of crisis intensity by other scholars we check a number of different indicators of crisis intensity and a variety of different country samples while countries with higher income and looser credit market regulation seemed to suffer worse crises we find few clear reliable indicators in the pre crisis data of the incidence of the great recession countries with current account surpluses seemed better insulated from slowdowns

predicting currency crises abstract in recent years a number of researchers have claimed success in systematically predicting which countries are more likely to suffer currency crises most notably kaminsky lizondo and reinhart 1998 this paper evaluates the klr approach to anticipating currency crises and develops and tests an alternative first we try to answer the question if we had been using the klr model in late 1996 how well armed would we have been to predict the asia crisis second we analyze a more general probit based model of predicting currency crises in the process we test several basic assumptions underlying the indicators approach

exchange market mayhem the antecedents and aftermath of speculative attacks exchange market mayhem the antecedents and aftermath of speculative attacks this paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty oecd countries we consider the antecedents and aftermath of devaluations and revaluations flotations fixings and speculative attacks which may not be successful we find that realignments of fixed exchange rates are alike devaluations are preceded by political instability budget and current account deficits and fast growth of money and prices revaluations are mirror images of devaluations speculative attacks resemble devaluations but money growth and inflation are more endemic and there is no last minute attempt to tighten monetary policy in contrast few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables transitions between exchange rate regimes are largely idiosyncratic and are neither consistently provoked ex ante by systematic imbalances nor typically justified ex post by subsequent changes in policy we conclude that there are no clear early warning signals of many speculative attacks and no easy solutions for policy makers barry eichengreen andrew k rose and charles wyplosz

the impact of financial crises and tolerance for uncertainty abstract financial crises can have severe negative effects on investment one reason for this is that financial crises increase uncertainty increasing the real option value of delaying investment in this paper we show that the negative effect of crises on investment differs significantly across countries in countries with low tolerance for uncertainty the negative effect is strong the negative effect is absent in countries that are more tolerant of uncertainty these findings are similar across different types of financial crisis they vary as predicted across type of investor asset and industry and they are not driven by uncertainty averse countries adopting more rigid institutions

a cardan s discriminant approach to predicting currency crashes abstract this paper models large swings in exchange rates by introducing nonlinearity via the generalized normal gen distribution lye j n martin v l 1993 robust estimation nonnormalities and generalized exponential distributions journal of the american statistical association 88 261 267 as the distribution allows for bimodality a switch between modes may give rise to currency crashes a statistic known as cardan s discriminant based on the shape parameters of the gen is used to detect bimodality the cardan s discriminant is found to reliably predict currency crashes for eight emerging countries and generate relatively low false signals for stable currencies

a tail index tour across foreign exchange rate regimes in turkey this article uses daily foreign exchange data in the usd trl foreign exchange market to test for structural breaks due to exchange rate regime switches the analysis focus on extreme movements of exchange rate returns across different regimes using tail index indicators sequential and rolling tests developed by quintos et al 2001 are used to identify the dates of breaks in the turkish exchange rate for the period 28 january 1980 to 11 october 2004 and for the sub periods which cover the fixed exchange rate regime from 28 january 1980 to 22 february 2001 and the flexible exchange rate regime from 23 february 2001 to 11 october 2004 compelling evidence for breaks in the tail index is found not only across but also within different exchange rate regimes especially within the fixed regime moreover breakpoint dates are clustered right before the crisis in 2001 this makes the tail index indicator a fairly good candidate for a variable to be used in early warning systems for currency crises

what is really common in the run up to banking crises abstract arguing that crises are similar if they are predictable from historical experience we employ panel logit models to examine similarities in the run ups to the current global financial crisis and historical banking crises asset bubbles are the most common precursors

statistical distributions and the identification of currency crises abstract we use extreme value theory to identify periods of currency crisis for a broad cross section of asian european and latin american countries we argue that our methodology improves upon the more conventional methodology for defining currency crises because fewer parametric assumptions need to be satisfied we compare the incidence of currency crises using the conventional method with the incidence obtained using our method we conclude that identifying currency crises using extreme value theory is a good alternative to the conventional method

did established early warning signals predict the 2008 crises abstract over the past 60 years a voluminous literature has painstakingly developed crises theories and their associated early warning signals the hallmark of this literature is the consistency with which selected early warning signals such as the level of reserves and exchange rate appreciations are presumed to predict different types of crises across countries and time the diversity of crises theories that motivate early warning signals presents however a challenge to empirical implementations given that the true model of early warning signals is unknown omitted variable bias contaminates estimates and confidence levels when the uncertainty surrounding a particular theory has been ignored after addressing model uncertainty in early warning signal regressions using an extended version of frankel and saravelos 2012 j int econ 87 216 231 dataset we do not find a single early warning signal that alerts to all dimensions of the 2008 crisis instead distinct sets of early warning signals identify different dimensions of the crisis banking balance of payments exchange rate pressure and recession

developing an early warning system to predict currency crises abstract the purpose of this paper is to develop an early warning system to predict currency crises in this study a data set covering the period of january 1992 december 2011 of turkish economy is used and an early warning system is developed with artificial neural networks ann decision trees and logistic regression models financial pressure index fpi is an aggregated value composed of the percentage changes in dollar exchange rate gross foreign exchange reserves of the central bank and overnight interest rate in this study fpi is the dependent variable and thirty two macroeconomic indicators are the independent variables three models which are tested in turkish crisis cases have given clear signals that predicted the 1994 and 2001 crises 12 months earlier considering all three prediction model results turkey s economy is not expected to have a currency crisis ceteris paribus until the end of 2012 this study presents uniqueness in that decision support model developed in this study uses basic macroeconomic indicators to predict crises up to a year before they actually happened with an accuracy rate of approximately 95 it also ranks the leading factors of currency crisis with regard to their importance in predicting the crisis

does risk aversion affect bank output loss the case of the eurozone abstract we propose a new model to infer the evolution of bank specific output losses due to the uncertainty in bank output prices losses are based on bank risk aversion with micro foundations tethered to the uncertainty regarding prices our model allows us to measure time varying bank specific output losses and risk aversion while taking into account all bank cross sectional heterogeneity we employ a panel data set to estimate the input and output elasticities with both parametric and non parametric techniques we are the first to document that increasing risk aversion among eurozone banks during the financial crisis resulted in sizable output losses although subdued thereafter losses have been resurging in recent years both conventional and unconventional monetary policy responses by the european central bank ecb mitigated uncertainty in bank output prices though unequally so across countries certain measures of unconventional monetary policy may have even enhanced bank risk aversion and thereby output losses but mainly so for large countries

capital controls and exchange rate instability in developing economies abstract a large literature on the appropriate sequencing of financial liberalization suggests that removing capital controls prematurely may contribute to currency instability this paper investigates whether legal restrictions on international capital flows are associated with greater currency stability we employ a comprehensive panel data set of 69 developing economies over the 1975 1997 period identifying 160 currency crises we control for macroeconomic political and institutional characteristics that influence the probability of a currency crisis employ alternative measures of restrictions on international payments and account for possible joint causality between the likelihood of a currency attack and the imposition of capital controls we find evidence that restrictions on capital flows do not effectively insulate economies from currency problems rather countries with less restrictive capital controls and more liberalized regimes appear to be less prone to speculative attacks