How Useful are Credit Gap-Based Early Warning Indicators of Financial Crises?

Are early warning indicators based on credit-gaps good predictors of financial crises? We systematically investigate the impact of modeling choices on the the ability of credit gap-based early warning indicators (EWIs) to predict financial crises in both advanced and emerging economies. The experiment is intentionally rigged to maximize the predictive ability of EWIs in real time. Even so, the performance of EWIs is mixed for advanced economies and poor for emerging economies. We offer several important practical implications, including on the limitations of the commonly used AUROC curve to assess effectiveness of EWIs