EARLY WARNING INDICATORS FOR MACROFINANCIAL ACTIVITY IN ROMANIA

Overheating of economic and financial activities leads to macrofinancial imbalances that may disrupt financial stability, and can be detected by studying relevant indcators. In this study we developed an aggregate early warning index of macrofinancial activity for Romania over the 1998q1-2020q4 period, employing data from six categories: (i) macroeconomic risks, (ii) bank risks, (iii) activity of corporations and households, (iv) monetary and financial conditions, (v) risk appetite and (vi) external shocks. We determine the utility of these variables from two perspectives: (i) whether these indicators are able to detect overheating of macrofinancial activity in Romania in two periods characterized by systemic crises and (ii) whether these variables successfully minimize various statistical errors involved in forecasting future events. Comparing the evolution of our index with a series of indicators that measure investors’ perception of macrofinancial stability or the probability of default of Romanian economy, we note the positive correlation between these two, but our index exhibits a more pronounced early warning component, making it extremely useful in anticipating future systemic crises.