What do we know about the causes of the crisis?
The global crisis has left many calling for early warning systems to prompt authorities into action before it’s too late. This column argues that such a system is restricted by our understanding of what caused the crisis in the first place. Indeed, it shows that popular explanations for the current crisis have little to no ability to predict past crises.
The Great Recession was the most important macroeconomic event in a generation. Policymakers are scrambling to guard against any repeat of these cataclysmic events.
One strand of this effort is aimed at setting up an early warning system. The idea is to provide early warnings of macroeconomic or financial vulnerabilities and impending danger. This work seeks to create statistical models that link crisis causes to their effects; it is based on econometric models of the incidence of macroeconomic and financial crises.