Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis

By Jeffrey A. Frankel, George Saravelos. 2012

492 citations recorded by the source corpus.

This paper investigates whether leading indicators can help explain the cross-country incidence of the 2008-09 financial crisis. Rather than looking for indicators with specific relevance to the current crisis, the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators. The review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and crises in the past. For the 2008-09 crisis, we use six different variables to measure crisis incidence: drops in GDP and industrial production, currency depreciation, stock market performance, reserve losses, and participation in an IMF program. We find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008-09 crisis, in line with the conclusions of the pre-2008 literature. In addition to reserves, recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis. So is the exchange rate regime. We define the period of the global financial crisis as running from late 2008 to early 2009, which probably explains why we find stronger results than earlier papers such as Obstfeld, Shambaugh and Taylor (2009, 2010) and Rose and Spiegel (2009a,b) which use annual data.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/66c28ea78e08115b41eefe698041032865d13569

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Citations in the corpus

Global Waves of Debt: Causes and Consequences (2021, background): “See Chamon and Crowe (2012); Kaminsky, Lizondo, and Reinhart (1998); and Frankel and Saravelos (2012) for reviews of the early warning literature. Berg, Borensztein, and Patillo (2005) review the performance of early warning models.”
International Reserves and Rollover Risk (2013, unknown): “In this section, we analyze through the lens of our model how three developments in emerging markets can deliver the upward path in reserves observed in the data since the 1990s, as presented in Figure 2.”
Post-Mortem Examination of the International Financial Network (2012, unknown): “Finally, as reported elsewhere (Frankel and Saravelos, 2011), larger current account surpluses partly shielded economies from the crisis.”
Model Averaging and Its Use in Economics (2017, methodology): “An algorithm for finding the best models is the so-called leaps and bounds method used by Raftery (1995) for BMA, based on the all-subsets regression algorithm of Furnival and Wilson (1974). The resulting set of best models can then still be reduced further through Occam’s window if required.”
Financial Crises: Explanations, Types, and Implications (2013, unknown): “Frankel and Saravelos (2012) perform a meta-analysis based on reviews of crises prediction models and seven papers published since 2002.”
Foreign effects of higher U.S. interest rates (2019, background): “Georgiadis (2016)’s recent study is closely related to ours.”
Banking, debt, and currency crises in developed countries: Stylized facts and early warning indicators (2014, background): “…(Levy-Yeyati and Panizza, 2011), the level of central bank reserves and real exchange rate appreciation for costly events such as the recent financial crisis (Frankel and Saravelos, 2012), and a combination of several indicators into composite indices for banking crises (Borio and Lowe, 2002).”