Tuesday, October 22, 2013

Crisis models of boom and bust

Vox asks Could an early warning system have predicted the crisis? | vox:

 "In a recent paper, we empirically model the cross-country incidence of the financial crisis (Rose and Spiegel 2009). Because the time-series component of an early warning system has proven harder to predict, we view the ability to predict relative performance in the cross section as a necessary, but not sufficient, condition for early warning models to be successful. We estimate a “MIMIC” (Multiple-Indicator Multiple Cause) model (Goldberger 1972), which we apply to a cross-sectional data set of 107 countries. The MIMIC specification explicitly acknowledges that the severity of a financial crisis is a continuous, rather than a discrete phenomenon, and one that can only be observed with error."
There is more work here and here that may be useful

This may be one way to look at the Minsky model and the bank lending model that will flow from it.

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