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The Role of Corporate, Legal and Macroeconomic Balance Sheet Indicators in Crisis Detection and Prevention

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Author Info

  • Manuel De la Rocha
  • Roberto Perrelli
  • Christian B. Mulder

Abstract

This study tests the recent balance sheet explanations of external crises in emerging market countries and the role of standards in these crises. Using several unique data sets, it finds that corporate sector balance sheets have a very significant impact on both the likelihood and depth of external crises. The indicators supplement, rather than substitute for traditional macroeconomic variables with standards playing potentially an important role. The results have implications for strategies to limit external vulnerability: they suggest that policymakers need to promote sound private sector financial structures, support sound shareholder rights, in addition to employing prudent macroeconomic policies to reduce exposure to crises. In sample predictions point to potentially large improvements in the predictive power of models that include these indicators.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/59.

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Length: 27
Date of creation: 01 Mar 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/59

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  1. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(4), pages 561-586, August.
  2. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
  3. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
  4. Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment," NBER Working Papers 7792, National Bureau of Economic Research, Inc.
  5. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? a Test," IMF Working Papers 98/154, International Monetary Fund.
  6. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, Springer, vol. 6(4), pages 459-472, November.
  7. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
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