Macroeconomic imbalance procedure (MIP) scoreboard indicators and their predictive strength of “multidimensional crises”

Keywords: macroeconomic imbalance procedure, economic crisis, multidimensional crisis, ordered probit model

Abstract

Research background: The evaluation of the predictive strength of MIP indicators in relation to crises is extremely important for the process of coordinating the economic policies of the EU countries. MIP is one of the pillars of the economic crisis prevention procedure. Predictive power of individual indicators has not been tested before their introduction.

Purpose of the article: Evaluation of the predictive strength of fourteen MIP indicators in relation to multidimensional crises in the EU countries.

Methods: We used ordered probit model to test the ability of MIP indicators to correctly predict episodes of “multidimensional crises” (as defined by the authors) in the period between 2008 and 2017 in all EU Member States.

Findings & Value added: We defined “multidimensional crises”, combining several negative phenomena into one limited dependent variable. This work is also novel in its application of probit regression to test the predictive strength of MIP indicators with an ordered probit model. We identified five MIP variables which were statistically significant in predicting “multidimensional crises” for all EU countries: net international investment position, nominal unit labour cost index, house price index, private sector credit flow and general government gross debt. Other variables turned out to be less important or not effective in crises prediction.

Downloads

Download data is not yet available.

References

Aldasoro, I., Borio, C., & Drehmann, M. (2018). Early warning indicators of banking crises: expanding the family. BIS Quarterly Review, March.

Beck, K. (2013). Determinants of business cycles synchronization in the European Union and the Euro Area. Equilibrium. Quarterly Journal of Economics and Economic Policy, 8(4). doi: 10.12775/equil.2013.025.

Beck, K. (2019). What drives business cycle synchronization? BMA results from the European Union. Baltic Journal of Economics, 19(2). doi: 10.1080/1406 099x.2019.1652393.

Borio, C., & Drehmann, M. (2009). Assessing the risk of banking crises - revisited. BIS Quarterly Review, March.

Boysen-Hogrefe, J., Jannsen, N., Plödt, M., & Schwarzmüller, T. (2015). An empirical evaluation of macroeconomic surveillance in the European Union. Kiel Working Paper (Vol. 2014). doi: 10.1111/j.1467-6346.2007.00779.x.

Catão, L. A. V, & Milesi-Ferretti, G. M. (2014). External liabilities and crises. Journal of International Economics, 94. doi: 10.1016/j.jinteco. 2014.05.003.

Christofides, C., Eicher, T. S., & Papageorgiou, C. (2016). Did established early Warning Signals predict the 2008 crises? European Economic Review, 81. doi: https://doi.org/10.1016/j.euroecorev.2015.04.004.

Claessens, S., & Kose, M. A. (2013). Financial crises: explanations, types, and implications. IMF Working Paper, 28.

Crockett, A. (1996). The theory and practice of financial stability. Economist, 144(4). doi: https://doi.org/10.1007/BF01371939.

Csortos, O., & Szalai, Z. (2014). Early warning indicators: financial and macroeconomic imbalances in Central and Eastern European countries. MNB Working Papers, 2.

De Scheemaekere, X., Oosterlinck, K., & Szafarz, A. (2015). Identifying economic crises: insights from history. Financial History Review, 22(1). doi: 10.1017 /S0968565015000025.

Domonkos, T., Ostrihoň, F., Šikulová, I., & Širaňová, M. (2017). Analysing the relevance of the MIP scoreboard’s indicators. National Institute Economic Review, 239(1). doi: 10.1177/002795011723900112.

ECB (2010). The “great inflation”: lessons for monetary policy. Monthly Bulletin, May.

Efstathiou, K., & Wolff, G. (2018). Is the European Semester effective and useful? Bruegel Policy Contribution, 09. Retrieved form http://bruegel.org/wp-content/uploads/2018/06/PC-09_2018_2.pdf.

Erhart, S., Becker, W., & Saisana, M. (2018). The macroeconomic imbalance procedure - from the scoreboard and thresholds to the decisions. Publications Office of the EU. doi: https://doi.org/10.2760/038148.

European Commission (2011). EU economic governance “Six Pack” - state of play. 28 September (Issue September 2010). http://europa.eu/rapid/press-release_MEMO-11-647_en.htm.

European Commission (2012). Scoreboard for the surveillance of macroeconomic imbalances. European Economy Occasional Papers, 92. doi: 10.2765/20196.

Frankel, J. A., & Rose, A. K. (1996). Currency crashes in emerging markets: an empirical treatment. International Finance Discussion Papers , Board of Governors of the Federal Reserve System (U.S.), 534.

Gourinchas, P. O., & Obstfeld, M. (2011). Stories of the twentieth century for the twenty-first. American Economic Journal: Macroeconomics, 4(1). doi: 10.1257/mac.4.1.226.

Greene, W. H. (2003). Econometric analysis. Pearson Education, Inc.

IMF (2009). Balance of payments and international investment position manual.

Kaminsky, G. (1998). Currency and banking crises: the early warnings of distress. International Finance Discussion Papers , Board of Governors of the Federal Reserve System (U.S.), 629.

Kaminsky, G., Lizondo, S., & Reinhart, C. M. (1998). Leading indicators of currency crises. IMF Staff Papers, 45(1).

Knedlik, T. (2014). The impact of preferences on early warning systems - the case of the European Commission’s Scoreboard. European Journal of Political Economy, 34(1174). doi: 10.1016/j.ejpoleco.2014.01.008.

Kološta, S., Kráľ, P., & Flaška, F. (2018). Alternative measures of macroeconomic imbalances in the EU – design and verification. E+M Ekonomie a Management, 22(1). doi: 10.15240/tul/001/2019-1-003.

Laeven, L., & Valencia, F. (2012). Systemic banking crises database: an update. IMF Working Paper, WP/12/163.

Lo Duca, M., Koban, A., Basten, M., Bengtsson, E., Klaus, B., Kusmierczyk, P., Lang, J., Detken, C., & Peltonen, T. (2017). A new database for financial crises in European countries. Occasional Paper Series, 13. doi: 10.2849/119019.

Mishkin, F. S. (2011a). Monetary policy strategy: lessons from the crisis. NBER Working Paper Series, 16755.

Mishkin, F. S. (2011b). Over the cliff: from the subprime to the global financial crisis. Journal of Economic Perspectives, 25(1). doi: 10.1257/jep.25.1.49.

Mızrak, F., & Yüksel, S. (2019). Significant determiners of Greek debt crisis: a comparative analysis with Probit and MARS approaches. International Journal of Finance & Banking Studies, 8(3). doi: 10.20525/ijfbs.v8i3.834.

Oesterreichische Nationalbank (2001). Financial stability report 2.

Osborne, J. W. (2015). Best practices in logistic regression. SAGE Publications Ltd. doi: 10.4135/9781483399041.

Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances. (2011). Official Journal of the European Union, 2011(1176).

Reinhart, C. M., & Rogoff, K. S. (n.d.). Dates for Banking Crises, Currency Crashes, Sovereign Domestic or External Default (or Restructuring), Inflation Crises, and Stock Market Crashes (Varieties). https://www.carmenreinhart.com/data/browse-by-topic/topics/7/.

Reinhart, C. M., & Rogoff, K. S. (2009). The aftermath of financial crises. American Economic Review, 99(2). doi: 10.1257/aer.99.2.466.

Siranova, M., & Radvanský, M. (2018). Performance of the macroeconomic imbalance procedure in light of historical experience in the CEE region. Journal of Economic Policy Reform, 21(4). doi: 10.1080/17487870.2017.1364642.

Statistical Annex of Alert Mechanism Report 2018. (2017). Commission Staff Working Document (Issue SWD(2017) 661 final).

Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data. Cambridge, MA, London: The MIT Press.

Published
2020-03-31
How to Cite
Biegun, K., & Karwowski, J. (2020). Macroeconomic imbalance procedure (MIP) scoreboard indicators and their predictive strength of “multidimensional crises”. Equilibrium. Quarterly Journal of Economics and Economic Policy, 15(1), 11-28. https://doi.org/10.24136/eq.2020.001
Section
Articles