Paul Wachtel (New York University): When to Lean Against the Wind

Paul Wachtel (New York University): When to Lean Against the Wind

Co-authors: Björn Richter, Moritz Schularick

Abstract

This paper shows that policy-makers can distinguish between good and bad credit booms with high accuracy and they can do so in real time. Evidence from 17 countries over nearly 150 years of modern financial history shows that credit booms that are accompanied by house price booms and a rising loan-to-deposit-ratio are much more likely to end in a systemic banking crisis. We evaluate the predictive accuracy for different classification models and show that the characteristics of the credit boom contain valuable information for sorting the data into good and bad booms. Importantly, we demonstrate that policy-makers have the ability to spot dangerous credit booms on the basis of data available in real time. We also show that these results are robust across alternative specifications and time-periods.

Keywords: Banking Crises, Crisis Prediction, Credit Booms, Macroprudential Policy

This seminar is open to all researchers interested in the subjects covered. Those wishing to attend the seminar are kindly asked to register in advance, by email bofit(at)bof.fi or tel. +358 9 183 2268.  Visitors are escorted to the seminar room from the Rauhankatu 19 B (Library) entrance.