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Signalling fiscal stress in the euro area: A country-specific early warning system

Author

Listed:
  • Pablo Hernández de Cos

    (Banco de España)

  • Enrique Moral-Benito

    () (Banco de España)

  • Gerrit B. Koester

    (Banco Central Europeo)

  • Christiane Nickel

    (Banco Central Europeo)

Abstract

The sovereign debt crisis in the euro area has raised interest in early warning indicators, aimed at signalling the build-up of fiscal stress in advance and helping prevent crises by means of a timely counteraction of fiscal and macroeconomic policies. This paper presents possible improvements to enhance existing early warning indicators for fiscal stress, especially for the euro area. We show that a country-specific approach could strongly increase the signalling power of early warning systems. Finally, we draw policy conclusions for the setting-up and application of a system of early warning indicators for fiscal stress.

Suggested Citation

  • Pablo Hernández de Cos & Enrique Moral-Benito & Gerrit B. Koester & Christiane Nickel, 2014. "Signalling fiscal stress in the euro area: A country-specific early warning system," Working Papers 1418, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1418
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/14/Fich/dt1418e.pdf
    File Function: First version, July 2014
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    References listed on IDEAS

    as
    1. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    2. Bussiere, Matthieu & Fratzscher, Marcel, 2006. "Towards a new early warning system of financial crises," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 953-973, October.
    3. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 1-5.
    4. Bertrand Candelon & Elena-Ivona Dumitrescu & Christophe Hurlin, 2012. "How to Evaluate an Early-Warning System: Toward a Unified Statistical Framework for Assessing Financial Crises Forecasting Methods," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(1), pages 75-113, April.
    5. Richard Hemming & Axel Schimmelpfennig & Michael Kell, 2003. "Fiscal Vulnerability and Financial Crises in Emerging Market Economies," IMF Occasional Papers 218, International Monetary Fund.
    6. Katia Berti & Matteo Salto & Matthieu Lequien, 2012. "An early-detection index of fiscal stress for EU countries," European Economy - Economic Papers 2008 - 2015 475, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
    8. van den Berg, Jeroen & Candelon, Bertrand & Urbain, Jean-Pierre, 2008. "A cautious note on the use of panel models to predict financial crises," Economics Letters, Elsevier, vol. 101(1), pages 80-83, October.
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    Citations

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    Cited by:

    1. Magkonis, Georgios & Tsopanakis, Andreas, 2016. "The financial and fiscal stress interconnectedness: The case of G5 economies," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 62-69.
    2. Martin Bruns & Tigran Poghosyan, 2016. "Leading Indicators of Fiscal Distress; Evidence from the Extreme Bound Analysis," IMF Working Papers 16/28, International Monetary Fund.
    3. Dufrénot, Gilles & Gente, Karine & Monsia, Frédia, 2016. "Macroeconomic imbalances, financial stress and fiscal vulnerability in the euro area before the debt crises: A market view," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 123-146.
    4. repec:ksa:szemle:1732 is not listed on IDEAS
    5. Michele Lanotte & Giacomo Manzelli & Anna Maria Rinaldi & Marco Taboga & Pietro Tommasino, 2016. "Easier said than done? Reforming the prudential treatment of banks’ sovereign exposures," Questioni di Economia e Finanza (Occasional Papers) 326, Bank of Italy, Economic Research and International Relations Area.
    6. Cláudia Braz & João Amador & Lara Wemans & Maria Manuel Campos & Sharmin Sazedj, 2016. "Public debt sustainability:Methodologies and debates in European institutions," Working Papers o201601, Banco de Portugal, Economics and Research Department.
    7. Stéphanie Pamies Sumner & Katia Berti, 2017. "A Complementary Tool to Monitor Fiscal Stress in European Economies," European Economy - Discussion Papers 2015 - 049, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    8. Csaba Tóth G., 2014. "The Forecasting Capacity of Indicators Measuring Budget Sustainability," Public Finance Quarterly, State Audit Office of Hungary, vol. 59(4), pages 511-528.

    More about this item

    Keywords

    fiscal policy; studies of particular policy episodes; general outlook and conditions; deficit; surplus; debt; debt management; sovereign debt; international lending and debt problems.;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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