Banking crisis prediction with differenced relative credit
Kauko, Karlo; Tölö, Eero (06.06.2019)
JulkaisusarjaBoF Economics Review
JulkaisijaBank of Finland
Julkaisun pysyvä osoite onhttps://urn.fi/URN:NBN:fi:bof-201906061225
Indicators based on the ratio of credit to GDP have been found to be highly useful predictors of banking crises. We study the difference in this ratio as an early warning indicator. We test a large number of different versions of the differenced credit-to-GDP ratio with data on Euro area members. The optimal time interval of the difference is about two years. Using the moving average of GDP instead of the latest annual data has little impact on forecasting performance. The indicator is a particularly promising choice at relatively short forecasting horizons, such as two or three years.
Published in Applied Economics Quarterly 2019 ; 65 ; 9 http://urn.fi/URN:NBN:fi:bof-202002181134