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Summary of Paper
Leverage and Recessions
Some Comments
Discussion of
“The Role of Credit, House Prices, Non-Core Liabilities, and
Exuberance Measures for Predicting Financial Crises”
by A. Anundsen, K. Gerdrup, F. Hansen, and K. Kragh-Sørensen
Kevin J. Lansing1
FRB San Francisco
October 22, 2014
RBNZ Workshop
The Interaction of Monetary and Macroprudential Policy
1 Any opinions expressed here do not necessarily re‡ect the views of the management of the Federal Reserve
Bank of San Francisco or of the Board of Governors of the Federal Reserve System
Summary of Paper
Leverage and Recessions
Some Comments
What variables help to predict …nancial crises?
Authors estimate a multivariate logit model of crises
probability to give early warning signal up to 3 years ahead.
(27 total crisis episodes in panel).
Summary of Paper
Leverage and Recessions
Some Comments
What variables help to predict …nancial crises?
Authors estimate a multivariate logit model of crises
probability to give early warning signal up to 3 years ahead.
(27 total crisis episodes in panel).
Multivariate extension of Drehmann, Borio, and Tsatsaronis
(IJCB 2011). Nevertheless, the Credit/GDP gap alone
appears to predict crises just as well in out-of-sample
forecasting exercises.
Summary of Paper
Leverage and Recessions
Some Comments
What variables help to predict …nancial crises?
Authors estimate a multivariate logit model of crises
probability to give early warning signal up to 3 years ahead.
(27 total crisis episodes in panel).
Multivariate extension of Drehmann, Borio, and Tsatsaronis
(IJCB 2011). Nevertheless, the Credit/GDP gap alone
appears to predict crises just as well in out-of-sample
forecasting exercises.
Household Credit/GDP gap is a more important predictor of
crises (in-sample) than Business Credit/GDP gap.
Summary of Paper
Leverage and Recessions
Some Comments
What variables help to predict …nancial crises?
Authors estimate a multivariate logit model of crises
probability to give early warning signal up to 3 years ahead.
(27 total crisis episodes in panel).
Multivariate extension of Drehmann, Borio, and Tsatsaronis
(IJCB 2011). Nevertheless, the Credit/GDP gap alone
appears to predict crises just as well in out-of-sample
forecasting exercises.
Household Credit/GDP gap is a more important predictor of
crises (in-sample) than Business Credit/GDP gap.
Inclusion of Global Credit/GDP gap improves in-sample …t of
model. “A tree’s risk of catching …re is usually small, except
when the forest is ablaze.” –Jorda (IJCB 2011).
Summary of Paper
Leverage and Recessions
Some Comments
What variables help to predict …nancial crises?
Authors estimate a multivariate logit model of crises
probability to give early warning signal up to 3 years ahead.
(27 total crisis episodes in panel).
Multivariate extension of Drehmann, Borio, and Tsatsaronis
(IJCB 2011). Nevertheless, the Credit/GDP gap alone
appears to predict crises just as well in out-of-sample
forecasting exercises.
Household Credit/GDP gap is a more important predictor of
crises (in-sample) than Business Credit/GDP gap.
Inclusion of Global Credit/GDP gap improves in-sample …t of
model. “A tree’s risk of catching …re is usually small, except
when the forest is ablaze.” –Jorda (IJCB 2011).
Authors construct country-spec…c “exuberance measures” to
indicate explosive behavior in: (1) House Price/Income or (2)
Credit/GDP. These variables improve in-sample …t of model
but not much help in out-of-sample forecasts.
Summary of Paper
Leverage and Recessions
Some Comments
Leverage magni…es the severity of recessions
Source: IMF World Economic Outlook (2009), Chapter 3.
"Over-investment and over-speculation are often important; but
they would have far less serious results were they not conducted
with borrowed money."
— Irving Fisher (Econometrica, 1933, p. 341)
Summary of Paper
Leverage and Recessions
Some Comments
Leverage magni…es the severity of recessions
Source: IMF World Economic Outlook (2009), Chapter 3.
"Over-investment and over-speculation are often important; but
they would have far less serious results were they not conducted
with borrowed money."
— Irving Fisher (Econometrica, 1933, p. 341)
Data from 21 countries, 1970 to 2008
Total number of busts
Mean number of busts per country
Mean price decline per episode
Mean duration of episode
Mean decline in GDP per episode1
1. Relative to GDP trend.
House Price Stock Price
Busts
Busts
47
98
2.8
4.7
-18%
-37%
10 qtrs
7 qtrs
-4.3%
-1.3%
Summary of Paper
Leverage and Recessions
Some Comments
More household leverage makes recessions worse
Sources: M. King (EER 1994) and R. Glick and K.J. Lansing (FRBSF EL 2010).
Summary of Paper
Leverage and Recessions
Some Comments
Debt-to-income (DTI) versus Loan-to-value (LTV) ratios
DTI was an early warning signal of the dangerous buildup in U.S. household leverage.
Summary of Paper
Leverage and Recessions
Some Comments
What about Investment/GDP as a predictor variable?
Borio and Lowe (2002): “Periods of strong credit growth, booming
asset prices, and high levels of investment almost invariably lead to
stresses in the …nancial system.”
110
Real Residential Investment and Real House Price Index
(Each series normalized to 100 at the investment peak)
Real Business Investment and Real S&P 500 Index
(each series normalized to 100 at the investment peak)
140
Real Business Investment
100
120
90
100
Real Residential Investment
80
80
70
60
Real S&P 500 Index
60
50
Real S&P Case-Shiller Price Index
40
20
40
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Summary of Paper
Leverage and Recessions
Credit/GDP gap alone beats multivariate model
What about Household Credit/GDP gap alone?
Some Comments
Summary of Paper
Leverage and Recessions
Har vi en boligboble i Norge?
Norwegian ratios are well above the last major peak observed in late 1980s.
House Price/Income
Mortgage Debt/Income
Some Comments
Summary of Paper
Leverage and Recessions
Exuberance measures: Norway vs. U.S.
Why are Norway’s exuberance measures so low?
Why not compute household credit exuberance?
Jorda, Schularick, Taylor (2011): No 2008 crisis in Norway.
Some Comments