Banking and currency crises: differential diagnostics for developed countries

Arbeitspapier

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.

Object Details

• ISBN: 978-92-899-1623-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1810

Classification and Topics

• Classification: Wirtschaft ; Semiparametric and Nonparametric Methods: General ; Financial Markets and the Macroeconomy ; International Finance Forecasting and Simulation: Models and Applications ; Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation: Models and Applications ; Financial Crises
• Subject: Banking crises ; binary classification tree ; currency crises ; early warning indicators

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Joy, Mark ; Rusnák, Marek ; Šmídková, Kateřina ; Vašíček, Bořek
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/154243
• Last update: 10.03.2025, 11:42 AM CET