What do we know about the causes of the crisis?
Andrew K Rose, Mark M. Spiegel 02 August 2010
The global crisis has left many calling for early warning systems to prompt authorities into action before it’s too late. This column argues that such a system is restricted by our understanding of what caused the crisis in the first place. Indeed, it shows that popular explanations for the current crisis have little to no ability to predict past crises.
The Great Recession was the most important macroeconomic event in a generation. Policymakers are scrambling to guard against any repeat of these cataclysmic events.
One strand of this effort is aimed at setting up an early warning system. The idea is to provide early warnings of macroeconomic or financial vulnerabilities and impending danger. This work seeks to create statistical models that link crisis causes to their effects; it is based on econometric models of the incidence of macroeconomic and financial crises.
Global crisis Macroeconomic policy
global crisis, early warning
Reserves and other early warning indicators work in crisis after all
Jeffrey Frankel, George Saravelos 01 July 2010
Can “early warning indicators” predict which countries are most vulnerable to a crisis? This column argues that, contrary to findings released last year, early warning indicators were useful in identifying which nations were hit hardest by the Global Crisis from 2008 to 2009. The authors argue that the level of central bank reserves was particularly useful. Other useful early warning indicators include real effective exchange rate overvaluation, current accounts, and national savings.
With aftershocks of the recent global financial earthquake still being felt in some parts of the world, it would be useful to have a set of “early warning indicators” to tell us what countries are most vulnerable. Many scholarly papers in the past have been devoted to identifying leading indicators of crises (e.g. Rose and Spiegel 2009a).
reserves, global crisis, early warning
Could an early warning system have predicted the crisis?
Andrew K Rose, Mark M. Spiegel 03 August 2009
The 2008 global financial crisis has led to renewed calls for “early warning models” to reduce the risks of future crises. But this column says that few of the characteristics suggested as potential causes of the crisis actually help predict the intensity and severity of the crisis across countries. That bodes poorly for the performance of future early warning models.
The 2008 global financial crisis is notable for a number of reasons, including most obviously its severity and speed. The international span of the crisis has also been remarkable; essentially all the industrialised countries have been affected, as well as a large number of developing economies. The crisis has led to renewed interest in the creation of early warning models capable of predicting and hopefully mitigating severity of future crises of this type.
Global economy Macroeconomic policy
financial crises, MIMIC, early warning