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A Complementary Tool to Monitor Fiscal Stress in European Economies

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  • Stéphanie Pamies Sumner
  • Katia Berti

Abstract

This paper presents an indicator of fiscal distress for European economies based on a multivariate regression analysis (logit modelling, the L1 indicator) and on a recently updated dataset of fiscal stress episodes. This indicator presents some interesting features: relying on a parsimonious set of variables that have been tested for their conditional statistical significance, it exhibits an overall satisfactory insample performance. In line with Berti et al. (2012), this indicator confirms the importance of monitoring macro-financial variables to assess countries' vulnerabilities to fiscal distress. It also provides some evidence that the change in the public debt ratio is an important predictor of fiscal distress events, while the level of public debt would particularly matter when combined with macrocompetitiveness imbalances. Our analysis suggests that the L1 indicator could be used as a complementary tool to the Commission S0 indicator to monitor prospective fiscal risks, building on the respective strengths of the two approaches, while compensating for their limitations.

Suggested Citation

  • 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.
  • Handle: RePEc:euf:dispap:049
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    References listed on IDEAS

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    1. Mark Joy & Marek Rusnák & Kateřina Šmídková & Bořek Vašíček, 2017. "Banking and Currency Crises: Differential Diagnostics for Developed Countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(1), pages 44-67, January.
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    8. 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.
    9. Martin Bruns & Tigran Poghosyan, 2018. "Leading indicators of fiscal distress: evidence from extreme bounds analysis," Applied Economics, Taylor & Francis Journals, vol. 50(13), pages 1454-1478, March.
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    11. 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.
    12. Warmedinger, Thomas & Checherita-Westphal, Cristina & Drudi, Francesco & Setzer, Ralph & De Stefani, Roberta & Bouabdallah, Othman & Westphal, Andreas, 2017. "Debt sustainability analysis for euro area sovereigns: a methodological framework," Occasional Paper Series 185, European Central Bank.
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    Cited by:

    1. Martin Bruns & Tigran Poghosyan, 2018. "Leading indicators of fiscal distress: evidence from extreme bounds analysis," Applied Economics, Taylor & Francis Journals, vol. 50(13), pages 1454-1478, March.

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    More about this item

    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
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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