Predictable Financial Crises

Robin  Greenwood; Samuel G. Hanson; Andrei Shleifer; Jakob Ahm Sørensen

Predictable Financial Crises

Robin Greenwood, Samuel G. Hanson, Andrei Shleifer, Jakob Ahm Sørensen

Department of Finance

Research output: Other contribution › Net publication - Internet publication › Communication

Abstract

There is a long-standing debate on whether financial crises can be predicted. This column draws on a chronology of past financial crises and data on credit and asset prices for a panel of 42 countries between 1950-2016 and finds that if there is a large credit expansion with an asset price boom, then financial crises are highly predictable. These results are used to motivate a simple indicator that identifies periods of potential credit-market overheating. The indicator is shown to predict past crises in advance, suggesting that policymakers have time to act and take prophylactic policy interventions.

Original language	English
Publication date	15 Jul 2020
Place of Publication	London
Publisher	Centre for Economic Policy Research
Publication status	Published - 15 Jul 2020

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title = "Predictable Financial Crises",

abstract = "There is a long-standing debate on whether financial crises can be predicted. This column draws on a chronology of past financial crises and data on credit and asset prices for a panel of 42 countries between 1950-2016 and finds that if there is a large credit expansion with an asset price boom, then financial crises are highly predictable. These results are used to motivate a simple indicator that identifies periods of potential credit-market overheating. The indicator is shown to predict past crises in advance, suggesting that policymakers have time to act and take prophylactic policy interventions.",

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N2 - There is a long-standing debate on whether financial crises can be predicted. This column draws on a chronology of past financial crises and data on credit and asset prices for a panel of 42 countries between 1950-2016 and finds that if there is a large credit expansion with an asset price boom, then financial crises are highly predictable. These results are used to motivate a simple indicator that identifies periods of potential credit-market overheating. The indicator is shown to predict past crises in advance, suggesting that policymakers have time to act and take prophylactic policy interventions.

AB - There is a long-standing debate on whether financial crises can be predicted. This column draws on a chronology of past financial crises and data on credit and asset prices for a panel of 42 countries between 1950-2016 and finds that if there is a large credit expansion with an asset price boom, then financial crises are highly predictable. These results are used to motivate a simple indicator that identifies periods of potential credit-market overheating. The indicator is shown to predict past crises in advance, suggesting that policymakers have time to act and take prophylactic policy interventions.

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