In her paper “A Composite Indicator of Systemic Stress (CISS): The Case of Jamaica” Toni-Anne T. Milwood makes a strong case as for why and how composite indicators of systemic stress can be used to measure an economic threshold for systemic stress. Throughout the paper Ms. Millwood introduces two standard deviation model’s which conform to the moving averages and systemic shocks of the Jamaican economy over the sample periods January 2002 to December 2006, and January 2007 to June 2012. In the paper Ms. Millwood refrences M2 or near money deposits for her standard deviation model. I believe Ms. Millwood’s conclusion that by measuring M2 along with Threshold Vector Autoregression Models (TVAR) as well as Vector Auto Regression Models (VAR); and the inclusion of systemic shocks, she is able to predict future systemic shocks in the Jamaican economy.
However I take umbrage with something in her methodology.
The one point that I take issue with is the lack of a suitable weighted measures to take into account the amount of leveraged debt in her CISS. it may be true that Jamaica is mostly an economy based off of agriculture, and remittances. However the CISS which she postulates in her paper fail to adequately measure the systemic risk, as well as the systemic buoyancy inevitable in any sort of near money market that has not only leveraged assets, but also capital ratio requirements associated with those near assets preventing any major systemic shocks. So then while I agree with Ms. Millwood on the premise and conclusion of her argument, I must take exception with the methodology of how she came to her conclusions.
The Full paper can be found here: CISS Jamaica: A Case Study
I recommend it as it is a fascinating overview of a remittances dependent economy in a post housing bubble market.