Since the world became aware in the summer of 2007 of an imminent financial crisis, people have asked why so few experts saw it coming. There have been many calls for an early warning system for the world economy – but little has been said about how to build one.
To construct a global early warning system we have to overcome the predicament Alan Greenspan, the former US Federal Reserve chairman, highlighted 12 years ago. “How do we know when irrational exuberance has unduly escalated asset values?” he asked. “We should not underestimate … the complexity of the interactions of asset markets and the economy.”
Macroeconomic data alone cannot provide sufficient information to determine whether asset prices are inflated. We need to dig deeper and track the complexity of interactions in financial markets and the economy…
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