Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity

We 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.A quasi real time signaling approach is used to predict asset price booms that have serious real economy consequences. We use a loss function to rank the indicators given policy makers' relative preferences with respect to missed crises and false alarms and suggest a new measure for assessing the usefulness of indicators.Global measures of liquidity, in particular a global private credit gap, are the best performing indicators and display forecasting records, which are informative for policy makers interested in timely reactions to growing financial imbalances.

Research Highlights► We predict asset price booms that have serious real economy consequences. ► Early warning indicators are ranked according to policy makers' preferences. ► Global liquidity, in particular the global credit gap, is the best indicator. ► Our tool is informative for policy makers reacting to growing financial imbalances.