External Liabilities and Crises

 
Author/Editor: Catão, Luis ; Milesi-Ferretti, Gian-Maria
 
Publication Date: May 16, 2013
 
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Summary: We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970-2011, we find that the ratio of net foreign liabilities (NFL) to GDP is a significant crisis predictor, and the more so when it exceeds 50 percent in absolute terms and 20 percent of the country-specific historical mean. This is primarily due to net external debt--the effect of net equity liabilities is weaker and net FDI liabilities seem if anything an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor, either measured unconditionally or as deviations from conventionally estimated “norms”; iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises stricto sensu.
 
Series: Working Paper No. 13/113
Subject(s): External debt | Financial crisis | Current account | Foreign exchange | Foreign direct investment | Economic models

 
English
Publication Date: May 16, 2013
ISBN/ISSN: 9781484315910/2227-8885 Format: Paper
Stock No: WPIEA2013113 Pages: 37
Price:
US$18.00 (Academic Rate:
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