Abstract
The recent financial crisis has demonstrated in an impressive way that boom/bust cycles can have devastating effects on the real economy. This paper aims at contributing to the literature on early warning indicator exercises for asset price development. Using a sample of 17 industrialised OECD countries and the euro area over the period 1969 Q1 – 2011 Q2, an asset price composite indicator incorporating developments in both stock and house price markets is constructed. The latter is then further developed in order to identify periods that can be characterised as asset price booms and busts. The subsequent empirical analysis is based on an ordered logit-type approach incorporating several monetary, financial and real variables. Following some statistical tests, credit aggregates, the interest rate spread together with the house price growth gap and stock price developments appear to be useful indicators for the prediction of asset price developments.
Highlights
The recent financial crisis starting 2007 has shown that boom-bust-cycles can have devastating effects on the real economy
The present study extends the analysis of Gerdesmeier, Reimers and Roffia (2010, 2011) which focused on predicting asset price busts and booms using different probit models, respectively
Given that this study’s focus is on deriving a combined signal derived from several individual asset markets, a composite indicator combining stock and house price development is used
Summary
The recent financial crisis starting 2007 has shown that boom-bust-cycles can have devastating effects on the real economy. In 2000s in Iceland as well as Ireland and other countries have confirmed that, in some circumstances, boom-bust-cycles in asset prices can be very damaging as they may lead to financial and to macroeconomic instability Against this background, it is important to have indicators to assess the possible implications of large asset price movements and the building up of financial imbalances in the economy. It is important to have indicators to assess the possible implications of large asset price movements and the building up of financial imbalances in the economy In this respect, several recent studies have shown that the analysis of monetary and credit developments may be very useful (see for example Borio et al 1994, Adalid, Detken 2007, Gerdesmeier, Reimers, Roffia 2010, 2011). The opposite mechanism can sometimes be observed during asset price downward adjustments
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