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External Liabilities and Crises

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Author Info

  • Luis Catão
  • Gian-Maria Milesi-Ferretti

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/113.

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Length: 37
Date of creation: 16 May 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/113

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Related research

Keywords: External debt; Financial crisis; Current account; Foreign exchange; Foreign direct investment; Economic models; net external debt; net debt; current account balance; external liabilities; reserve accumulation; fiscal gap; current account deficits; debt crises; sovereign default; sovereign defaults; external liability; central bank; public debt; net external liabilities; current accounts; repayments; current account surpluses; private external debt; reserve assets; debt accumulation; foreign debt; external financing; budget balance; debt management; debt sustainability; foreign loans; currency crisis; external finance; debt stock; debt intolerance; current account adjustments; debt defaults; fiscal gaps; debt problems; reserve currency; government debt;

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References

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