Assessing Bias and Accuracy in the World Bank-IMF's Debt Sustainability Framework for Low-Income Countries

40 Pages Posted: 18 Apr 2014

See all articles by Andrew Berg

Andrew Berg

International Monetary Fund (IMF) - Developing Country Studies Division

Enrico Berkes

Ohio State University (OSU) - Department of Economics

Catherine A. Pattillo

International Monetary Fund (IMF) - Research Division

Andrea Filippo Presbitero

Università Politecnica delle Marche - Department of Economics; Centre for Macroeconomics & Finance Research (CeMaFiR)

Yorbol Yakhshilikov

International Monetary Fund (IMF)

Date Written: March 2014

Abstract

The World Bank and the IMF have adopted a debt sustainability framework (DSF) to evaluate the risk of debt distress in Low Income Countries (LICs). At the core of the DSF are empirically-based thresholds for each of five different measures of the debt burden (the “debt threshold approach” DTA). The DSF contains a rule for aggregating the information contained in these five different variables which we label the “worst-case aggregator” (WCA) in view of the fact that the DSF considers a breach of any one of the thresholds sufficient to indicate a high risk of debt distress. However, neither the DTA nor the WCA has heretofore been subject to empirical testing. We find that: (1) the DTA loses information relative to a simple proposed alternative; (2) the WCA is too conservative (predicting crises too often) in terms of the loss function used in the DSF; and (3) the WCA is less accurate than some simple proposed alternative aggregators as a predictor ofdebt distress.

Keywords: Debt sustainability analysis, Low-income developing countries, Debt burden, Sovereign debt, Financial crisis, Economic models, International Monetary Fund, World Bank, DSF, IMF, Sovereign debt crises, debt thresholds, external debt, ratio of debt, debt relief, debt stock, debt crisis, debt ratios, ratio of debt service to exports, currency crises, sovereign default, actual debt, public debt, long-term debt sustainability, external shocks, external debt sustainability, liquidity crises, foreign aid, debt relief initiative, currency crisis, amount of debt, external public debt, multilateral debt relief, debt problems, international lending, probability of debt crisis, external liabilities, low

JEL Classification: F33, F34, F35, O11

Suggested Citation

Berg, Andrew and Berkes, Enrico and Pattillo, Catherine and Presbitero, Andrea Filippo and Yakhshilikov, Yorbol, Assessing Bias and Accuracy in the World Bank-IMF's Debt Sustainability Framework for Low-Income Countries (March 2014). IMF Working Paper No. 14/48. Available at SSRN: https://ssrn.com/abstract=2426557

Andrew Berg (Contact Author)

International Monetary Fund (IMF) - Developing Country Studies Division ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8843 (Phone)
202-589-8843 (Fax)

Enrico Berkes

Ohio State University (OSU) - Department of Economics ( email )

United States

Catherine Pattillo

International Monetary Fund (IMF) - Research Division ( email )

700 19th Street NW
Washington, DC 20431
United States

Andrea Filippo Presbitero

Università Politecnica delle Marche - Department of Economics ( email )

Piazzale Martelli, 8
Ancona, AN 60121
Italy
+39 0712207074 (Phone)

HOME PAGE: http://sites.google.com/site/presbitero/

Centre for Macroeconomics & Finance Research (CeMaFiR) ( email )

Piazza Mirabello, 2
Milan, 20100
Italy

Yorbol Yakhshilikov

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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