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Taking the Pulse of Fiscal Distress: Inflation, Depreciation, and Crises

Author

Listed:
  • Jorge M. Uribe

    (School of Economics & Riskcenter, Universitat de Barcelona, Spain.)

  • Oscar Valencia

    (Fiscal Management Division, Inter-American Development Bank, Washington (USA))

Abstract

This study offers novel monthly estimates of the latent probability of fiscal crises for 163 countries, from January 1970 to December 2023. These indicators are constructed with minimal data requirements on prices and exchange rates and serve as a global early warning system for fiscal risk. The probabilities are estimated using a Random Forest model within a Mixed-Data Sampling (MIDAS) framework, trained on manually compiled fiscal crisis events. Using these indicators, we test nine hypotheses on the effects of country characteristics, time periods, and policy choices on the probability of fiscal crises. Countries with inflation-targeting regimes, on average, experience lower fiscal distress. Fiscal rules reduce the probability of crises while higher debt levels increase their likelihood. Our findings are particularly relevant for developing countries, where fiscal risk is higher than in advanced economies, even after controlling for policy choices and country-specific characteristics.

Suggested Citation

  • Jorge M. Uribe & Oscar Valencia, 2024. "Taking the Pulse of Fiscal Distress: Inflation, Depreciation, and Crises," IREA Working Papers 202416, University of Barcelona, Research Institute of Applied Economics, revised Dec 2024.
    • Handle: RePEc:ira:wpaper:202416
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    File URL: http://www.ub.edu/irea/working_papers/2024/202416.pdf
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    More about this item

    Keywords

    Fiscal Crisis; Early Warning Systems; Inflation Targeting; Fiscal Rules; Openness; Machine Learning. JEL classification: E63; H87; O23; G01; H12.;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • G01 - Financial Economics - - General - - - Financial Crises

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