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Activity Number:
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301
- Application of Asymmetric Classification and Multiple Testing
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Type:
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Invited
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Date/Time:
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Wednesday, August 11, 2021 : 3:30 PM to 5:20 PM
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Sponsor:
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WNAR
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Abstract #315529
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Title:
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International Reserves, Risk Tolerance, and Crisis Risk
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Author(s):
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Yang Feng* and Xin Tong and Weining Xin
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Companies:
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New York University and University of Southern California and International Monetary Fund
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Keywords:
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prevention policy;
crisis;
cost asymmetry;
Neyman-Pearson;
risk tolerence
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Abstract:
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This work investigates the mutual interaction between crisis risk estimation and crisis prevention policy in the context of sudden stops. Proposing a two-stage framework embedding an early-warning problem into a policy-making problem, this paper conducts a welfare analysis of crisis risk estimation based on subsequent policy responses. Building upon this two-stage framework, this paper shows that there is welfare cost asymmetry between two types of errors: the welfare-maximizing weight on the percentage of missed crises must be greater than that on the percentage of false alarms. Introducing a constrained optimization under the Neyman-Pearson paradigm to solve this error-asymmetry problem reduces overall welfare loss by more than 20 percent. Bringing this welfare-based crisis risk estimation model to emerging market countries’ data, this paper uncovers time-varying risk tolerance of policymakers and explores its policy implications on identifying leading indicators and determining levels of reserves through counterfactual analysis.
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Authors who are presenting talks have a * after their name.
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