'Real Time' Early Warning Indicators for Costly Asset Price Boom/Bust Cycles: A Role for Global Liquidity

Abstract

4Non-technical summary 5

Systemic Risk Diagnostics: Coincident Indicators and Early Warning Signals

“…The main idea is that a comparison of credit and macro-financial conditions yields a useful early warning indicator for financial stability. It can be seen as related to the notion of tracking credit quantities over time, such as the private credit to GDP ratio, which is in line with the relevant early warning literature, see for example Lowe (2002), Misina andTkacz (2008), Borio and Drehmann (2009), Alessi andDetken (2009), andBarrell, Davis, Karim, andLiadze (2010). The main difference is that we suggest to compare credit risk instead of credit quantities to macro-financial conditions.…”

Housing, consumption and monetary policy: How different are the US and the euro area?

“…3 Therefore, by comparing the US and the euro area there is something to be learnt about the role of housing in the business cycle more generally and 1 According to Ellis (2008), greater supply ‡exibility in the US may have been a source of risk during the latest housing boom, since it implied an excess of residential investment that would otherwise not have been possible. 2 As reported by Miles and Pillonca (2008), "overwhelmingly across Europe, a mortgage remains and nominal contract with repayments unrelated to movements in consumer or house prices".…”

The Development of the Global Financial Market in the Economic Cycle

“…Specifically, the most promising leading indicators of financial crises are based on simultaneous positive deviations (or "gaps") of the ratio of (private sector) credit-to-GDP and asset prices, especially property prices, from historical norms (Borio and Drehmann (2009), Alessi and Detken (2009)). 3 One can think of the credit gap as a rough measure of leverage in the economy, providing an indirect indication of the loss absorption capacity of the system; one can think of the property price gap as a rough measure of the likelihood and size of the subsequent price reversal, which tests that absorption capacity.…”