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Szilard Erhart

30 September 2019
WORKING PAPER SERIES - No. 102
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Abstract
The paper investigates the life-cycle of the 2008-2009 financial crisis by linking the Macroeconomic Imbalance Procedure (MIP) Scoreboard of the European Commission to the crisis database of the European Systemic Risk Board (ESRB). The novelty of the analysis is that early warning capacity of MIP indicators is empirically tested in case of various crisis events case by case (i) Currency/Balance-of-Payment/Capital flow events, (ii) Sovereign crisis events, (iii) Banking crisis events and (iv) Significant asset price corrections in EU Member States. Furthermore, we contribute to the literature by studying the predicting power of the MIP Scoreboard in the identification of the overheating in the economy in advance of crises (preventive arm of the MIP). We found that the predictive power of the MIP Scoreboard may be twice as high to capture sovereign and Currency/Balance-of-Payment/Capital flow type of crisis events than its power to capture a banking crisis or serious asset price corrections. We confirm the results of earlier empirical studies that some MIP indicators perform relatively well (current account and net international position) in all specifications. A simple composite indicator based on the threshold breaches of MIP Scoreboard Indicators, performed in most cases as good as the best individual indicator, and hence could be considered as an input to a simple, rule based and accountable decision making.
JEL Code
C40 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→General
G01 : Financial Economics→General→Financial Crises
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation