Leading Indicators of Fiscal Distress: Evidence from the Extreme Bound Analysis
IMF Working Papers, February 15, 2016
Source details
- Canonical URL
- Leading Indicators of Fiscal Distress: Evidence from the Extreme Bound Analysis
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Bibliographic details
- Authors: Martin Bruns, Tigran Poghosyan
- Published: February 15, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475594799.001
Summary and main findings
- Early warning systems (EWS) are widely used for assessing countries’ vulnerability to fiscal distress; most EWS employ a specific set of only fiscal leading indicators predetermined by the researchers, which casts doubt on their robustness.
- Using the Extreme Bound Analysis (EBA) to identify robust leading indicators from a large set, the study finds that both fiscal and non-fiscal leading indicators are robust.
- Examples of robust fiscal leading indicators: fiscal balance, foreign exchange debt.
- Examples of robust non-fiscal leading indicators: output, FX reserves, current account balance, openness.
- A fiscal vulnerability indicator that combines fiscal and non-fiscal leading indicators delivers a 29% gain in predictive power compared to a traditional indicator based on fiscal leading indicators only.
Methodology
- The study revisits robustness concerns in EWS by applying the Extreme Bound Analysis, which allows identification of robust leading indicators of fiscal distress from a broad candidate set.
- Results are assessed both in-sample and out-of-sample to evaluate predictive performance.
Predictive performance and key statistics
- Combined fiscal and non-fiscal vulnerability indicator: 29% gain in predictive power versus fiscal-only indicator.
- Out-of-sample performance for the period 2008–15:
- 78 percent of crises predicted correctly.
- 34 percent false alarm rate.
- Publication specifics reported in the source:
- Pages: 37
- Volume: 2016
- Issue: 028
- Series: Working Paper No. 2016/028
- DOI: https://doi.org/10.5089/9781475594799.001
- Stock No: WPIEA2016028
- ISBN: 9781475594799
- ISSN: 1018-5941
Policy implications and recommendations
- Both fiscal and non-fiscal leading indicators should be taken into account when assessing a country’s vulnerability to fiscal distress.
- Early warning frameworks and fiscal vulnerability indicators used by policymakers and international institutions should incorporate non-fiscal variables (for example, output, FX reserves, current account balance, openness) alongside traditional fiscal variables (for example, fiscal balance, foreign exchange debt) to improve predictive accuracy and reduce missed crises and false alarms.
Source: Leading Indicators of Fiscal Distress: Evidence from the Extreme Bound Analysis, Martin Bruns and Tigran Poghosyan, February 15, 2016, IMF Working Papers 2016, 028.