Assessing Bias and Accuracy in the World Bank-IMF's Debt Sustainability Framework for Low-Income Countries

Author/Editor:

Andrew Berg ; Enrico G Berkes ; Catherine A Pattillo ; Andrea F Presbitero ; Yorbol Yakhshilikov

Publication Date:

March 27, 2014

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The World Bank and the IMF have adopted a debt sustainability framework (DSF) to evaluate the risk of debt distress in Low Income Countries (LICs). At the core of the DSF are empirically-based thresholds for each of five different measures of the debt burden (the “debt threshold approach” DTA). The DSF contains a rule for aggregating the information contained in these five different variables which we label the “worst-case aggregator” (WCA) in view of the fact that the DSF considers a breach of any one of the thresholds sufficient to indicate a high risk of debt distress. However, neither the DTA nor the WCA has heretofore been subject to empirical testing. We find that: (1) the DTA loses information relative to a simple proposed alternative; (2) the WCA is too conservative (predicting crises too often) in terms of the loss function used in the DSF; and (3) the WCA is less accurate than some simple proposed alternative aggregators as a predictor of debt distress.

Series:

Working Paper No. 2014/048

Subject:

English

Publication Date:

March 27, 2014

ISBN/ISSN:

9781475579772/1018-5941

Stock No:

WPIEA2014048

Pages:

39

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