Working Paper

What Macroeconomic Conditions Lead Financial Crises?

Abstract: Research has suggested that a rapid pace of nonfinancial borrowing reliably precedes financial crises, placing the pace of debt growth at the center of frameworks for the deployment of macroprudential policies. I reconsider the role of asset-prices and current account deficits as leading indicators of financial crises. Run-ups in equity and house prices and a widening of the current account deficit have substantially larger (and more statistically-significant) effects than debt growth on the probability of a financial crisis in standard crisis-prediction models. The analysis highlights the value of graphs of predicted crisis probabilities in an assessment of predictors.

Keywords: Current account; Debt; Equity prices; Financial crisis; House prices;

JEL Classification: G01; E44; F32;

https://doi.org/10.17016/FEDS.2018.038

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2018-06-15

Number: 2018-038

Pages: 29 pages