1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Economic resilience: The usefulness of early warning indicators in OECD countries

The global financial crisis and the high associated costs have revived the academic and policy interest in “early warning indicators” of crises. This paper provides empirical evidence on the usefulness of a new set of vulnerability indicators, proposed in a companion paper (Röhn et al., 2015), in predicting severe recessions and crises in OECD countries. To evaluate the usefulness of the indicators the signalling approach is employed, which takes into account policy makers’ preferences between missing crises and false alarms. Our empirical evidence shows that the majority of indicators would have helped to predict severe recessions in the 34 OECD economies and Latvia between 1970 and 2014. Indicators of global risks consistently outperform domestic indicators in terms of their usefulness, highlighting the importance of taking international developments into account when assessing a country’s vulnerabilities. In the domestic areas, indicators that measure asset market imbalances (real house and equity prices, house price-to-income and house price-to-rent ratios), also perform consistently well both in and out-of sample. Domestic credit related variables appear particularly useful in signalling upcoming banking crises and in predicting the global financial crisis out-of-sample. The results are broadly robust to different definitions of costly events, different forecasting horizons and different time and country samples.

English

Keywords: crisis, recession, vulnerability, resilience
JEL: E32: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Business Fluctuations; Cycles; E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy; E51: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit / Money Supply; Credit; Money Multipliers; F47: International Economics / Macroeconomic Aspects of International Trade and Finance / Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation: Models and Applications
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