Financial and economic downturns in OECD countries

Abstract

This article empirically studies the linkages between financial variable downturns and economic recessions. We present evidence that real asset prices tend to lead real cycles, while loan-to-GDP and loan-to-deposit ratios lag them. Using a probit anaylsis, we document that downturns in real asset prices, particularly real house prices, are useful leading indicators of economic recessions.

Keywords:

• house prices
• economic recessions
• concordance index
• probit

JEL Classification:

• C23
• C22
• E32
• F30
• E00

Notes

¹ The selection of countries is based on the availability of the selected financial data at a quarterly frequency for the whole sample period.

² The data set was compiled by the Working Group on Econometric Modelling of the Eurosystem of Central Banks (ESCB) and used in Hubrich et al. (2013). The data are available upon request under a confidentiality agreement.

³ If the phase of, say, real house prices were independent of the phase of output, the concordance index (CI) would take the value CI = 0.125*0.37 + (1–0.125)* (1–0.37) = 0.58 (given that the unconditional relative frequency of output contractions in our sample is 0.125, while the unconditional relative frequency of falling house prices is 0.37).