Question

Table 2 below shows regression results from the study of Schularick and Taylor (2012).1 The dataset comprises annual panel data for 12 countries between 1870 and 2008. The study asks a simple question: does a country's recent history of credit growth help predict a financial crisis? The dependent variable is the probability of a financial crisis event pit in country i in year t.

	Ordinary Least Squares
	Country fixed effects
Explanatory variables	dependent variable in year t: pit
credit growth in the previous year (t-1)	-0.0273
	(0.0815)
credit growth in year t-2	0.302
	(0.0872)
credit growth in year t-3	0.0478
	(0.0853)
credit growth in year t-4	0.00213
	(0.0814)
credit growth in year t-5	0.0928
	(0.0752)
Observations	1,272
Countries	14
R-squared	0.023
Standard errors appear in parentheses.

Answer to the following questions (use the |t|>2 rule of thumb in your answers to indicate significance at the 95% level):

1. What is the estimated equation that corresponds to the results of Table 2?
2. b) Which coefficients in Table 2 are statistically significant?
3. What do the results of Table 2 say about the probability of a financial crisis? Explain your answer.

Answer 1

a.

The estimated regression equation is,

Probability of a financial crisis in year t = -0.0273 credit growth in year t-1 + 0.302 credit growth in year t-2 + 0.0478 credit growth in year t-3 + 0.00213 credit growth in year t-4 + 0.0928 credit growth in year t-5

b.

Test statistic, t = Coefficient / Std Error

t for credit growth in year t-1 = -0.0273 / 0.0815 = -0.3349693

t for credit growth in year t-2 = 0.302/ 0.0872 = 3.463303

t for credit growth in year t-3 = 0.0478/ 0.0853 = 0.5603751

t for credit growth in year t-4 = 0.00213/ 0.0814 = 0.02616708

t for credit growth in year t-5 = 0.0928/ 0.0752 = 1.234043

At 95% significance level, the coefficients are statistically significant for which |t| > 2

Thus, only the coefficient for credit growth in year t-2 is statistically significant.

c,

The results indicates that only credit growth in year t-2 is statistically significant in predicting the probability of a financial crisis in year t.