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

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Executive Summary

The authors test the performance of a host of real and financial variables as early warning indicators for costly aggregate asset price boom/bust cycles, using data for 18 OECD countries between 1970 and 2007. A signaling approach is used to predict asset price booms that have relatively serious real economy consequences. They use a loss function to rank the tested indicators given policy makers' relative preferences with respect to missed crises and false alarms. The paper analyzes the suitability of various indicators as well as the relative performance of financial versus real, global versus domestic and money versus credit based liquidity indicators.

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