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A data-driven approach to measuring financial soundness throughout the world

Author

Listed:
  • Alessandro Bitetto

    (University of Pavia)

  • Paola Cerchiello

    (University of Pavia)

  • Charilaos Mertzanis

    (University of Pavia)

Abstract

We use a fully data-driven approach and information provided by the IMF’s financial soundness indicators to measure the soundness of a country’s financial system around the world. Given the nature of the measurement problem, we apply principal component analysis (PCA) to deal with the presence of strong cross-sectional dependence in the data due to unobserved common factors. Using this comprehensive sample and various statistical methods, we produce a data-driven measure of financial soundness that provides policy makers and financial institutions with a tool that is easy to implement and update.

Suggested Citation

  • Alessandro Bitetto & Paola Cerchiello & Charilaos Mertzanis, 2021. "A data-driven approach to measuring financial soundness throughout the world," DEM Working Papers Series 199, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0199
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    File URL: http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0199.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial soundness; Data-driven; Cross-country; Policy framework; Principal Component Analysis; Random Forest;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • F02 - International Economics - - General - - - International Economic Order and Integration

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