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Sovereign debt crises in Latin America: A market pressure approach

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  • Kuper, Gerard
  • Jacobs, Jan
  • Boonman, Tjeerd

    (Groningen University)

Abstract

We construct a continuous sovereign debt crisis index for four large Latin American countries for the period 1870-2012. Our sovereign debt crisis index is similar to the Exchange Market Pressure Index for currency crises, and the Money Market Pressure Index for banking crises. To obtain the optimal set of indicators and the optimal value of the threshold for dating crises we apply the Receiver Operating Characteristic (ROC) curve. We calculate our sovereign debt crisis index as a weighted average of three indicators, the debt to GDP ratio, the external interest rate spread and the exports to imports ratio. The continuous index allows a more advanced analysis of sovereign debt crises. We include two applications. In the first application we investigate the relationship between sovereign debt crises and the business cycle in Latin America. Our second application constructs a similar index for five European countries.

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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 13016-EEF.

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Date of creation: 2013
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Handle: RePEc:dgr:rugsom:13016-eef

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  1. Oscar Jorda, 2010. "Carry Trade," Working Papers 1019, University of California, Davis, Department of Economics.
  2. Jan P. A. M. Lestano, 2007. "Dating currency crises with ad hoc and extreme value-based thresholds: East Asia 1970-2002 [Dating currency crises]," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 371-388.
  3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  4. Davide Furceri & Aleksandra Zdzienicka, 2011. "How Costly Are Debt Crises?," IMF Working Papers 11/280, International Monetary Fund.
  5. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
  6. Andrea Pescatori & Amadou N R Sy, 2007. "Are Debt Crises Adequately Defined?," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 306-337, June.
  7. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  9. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
  10. Ciarlone, Alessio & Trebeschi, Giorgio, 2005. "Designing an early warning system for debt crises," Emerging Markets Review, Elsevier, vol. 6(4), pages 376-395, December.
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