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A Multinomial Approach to Early Warning Systems for Debt Crises

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Author Info
Alessio Ciarlone () (Bank of Italy)
Giorgio Trebeschi () (Bank of Italy)
Abstract

This paper develops an early warning system for sovereign debt crises, broadly defined as episodes of outright default, failure of a country to be current on external obligations and substantial access to IMF resources. It estimates a multinomial logit model that makes it possible to differentiate between three regimes labelled ‘tranquil’, ‘pre-crisis’ and ‘adjustment’. The model includes a large set of macroeconomic variables and is able to predict, in-sample, 78 per cent of onsets of crisis while sending false alarms in 34 per cent of tranquil cases; its out-of-sample performance is very similar, with 70 per cent of entries into crisis correctly predicted and 20 per cent of tranquil cases triggering false alarms.

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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 588.

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Date of creation: May 2006
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Handle: RePEc:bdi:wptemi:td_588_06

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Related research
Keywords: emerging markets; early warning systems; debt crises; default;

Find related papers by JEL classification:
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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  1. Andrea Pescatori & Amadou N. R. Sy, 2004. "Debt Crises and the Development of International Capital Markets," IMF Working Papers 04/44, International Monetary Fund.
  2. Guiso, Luigi & Parigi, Giuseppe, 1996. "Investment and Demand Uncertainty," CEPR Discussion Papers 1497, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Eduardo Borensztein & Catherine A. Pattillo & Andrew Berg, 2004. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Working Papers 04/52, International Monetary Fund. [Downloadable!]
    Other versions:
  4. Visco, Ignazio, 1978. "On obtaining the right sign of a coefficient estimate by omitting a variable from the regression," Journal of Econometrics, Elsevier, vol. 7(1), pages 115-117, February. [Downloadable!] (restricted)
  5. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November. [Downloadable!] (restricted)
    Other versions:
  6. Reinhart, Carmen, 2002. "Default, currency crises, and sovereign credit ratings," MPRA Paper 13917, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  7. Ciarlone, Alessio & Trebeschi, Giorgio, 2005. "Designing an early warning system for debt crises," Emerging Markets Review, Elsevier, vol. 6(4), pages 376-395, December. [Downloadable!] (restricted)
  8. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany. [Downloadable!]
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  9. Paolo Manasse & Axel Schimmelpfennig & Nouriel Roubini, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund. [Downloadable!]
  10. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2005. "'Some contagion, some interdependence': More pitfalls in tests of financial contagion," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1177-1199, December. [Downloadable!] (restricted)
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  11. Amadou N. R. Sy, 2003. "Rating the Rating Agencies: Anticipating Currency Crises or Debt Crises," IMF Working Papers 03/122, International Monetary Fund. [Downloadable!]
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  12. Enrica Detragiache & Antonio Spilimbergo, 2001. "Crises and Liquidity - Evidence and Interpretation," IMF Working Papers 01/2, International Monetary Fund. [Downloadable!]
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