External Liabilities and Crises

May 16, 2013

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Luis Catão, and Gian M Milesi-Ferretti. External Liabilities and Crises, (USA: International Monetary Fund, 2013) accessed September 20, 2024

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

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.

Subject: Balance of payments, Current account, Current account balance, External debt, Financial crises, Foreign direct investment

Keywords: Crisis definition, Crisis probability, Crisis risk, Currency Crises, Current account, Current account balance, Current Account Imbalances, FDI liability, Foreign direct investment, Foreign Exchange Reserves, GDP, GDP coefficient, Global, International Investment Positions, Sovereign Debt, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/113
Stock No:

WPIEA2013113
ISBN:

9781484315910
ISSN:

1018-5941

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