A Multinomial Approach to Early Warning Systems for Debt Crises
AbstractThis 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 Â‘tranquilÂ’, Â‘pre-crisisÂ’ and Â‘adjustmentÂ’. 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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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 588.
Date of creation: May 2006
Date of revision:
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; Sovereign Debt
- E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-09 (All new papers)
- NEP-CBA-2006-07-09 (Central Banking)
- NEP-DCM-2006-07-09 (Discrete Choice Models)
- NEP-FMK-2006-07-09 (Financial Markets)
- NEP-PBE-2006-07-09 (Public Economics)
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