Financial crises are predictable: The case of the EU candidate countries

Abstract

The global financial crisis of 2007/2008 has rekindled the interest of economists and policymakers in explaining the occurrence of financial crises. The importance of predicting financial crises early on is especially true with the EU candidate countries that as a consequence of the recent crisis, have been forced to deal with multiple exogenous shocks simultaneously. The purpose of our paper is to assess the relative contribution of a wide array of determinants of financial crises and to build an econometric model which will serve as a tool for predicting future financial crises. By specifying a binomial logit model based on actual quarterly panel data for the four EU candidate countries (Croatia, Macedonia, Turkey and Iceland) over a long sample period (from January 2005 to September 2012), we find the GDP growth rate, the trade balance as a percentage of GDP, the ratio of bank deposits to GDP and the budget balance as a percentage of GDP the key macroeconomic determinants of financial crises incidence. The obtained empirical results give support to the thesis that financial crises are predictable. However, they can not be solely explained by only one group of variables, but by a number of different types of determinants.