External Liabilities and Crises

45 Pages Posted: 25 Sep 2014

See all articles by Luis A. V. Catão

Luis A. V. Catão

Inter American Development Bank

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: July 2014


We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970-2011, we find that the ratio of net foreign liabilities to GDP is a significant crisis predictor. This is primarily due to the net position in debt instruments--the effect of net equity liabilities is weaker and net FDI liabilities seem if anything an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor; iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises sensu stricto.

Keywords: currency crises, current account imbalances, foreign exchange reserves, international investment positions, sovereign deebt

JEL Classification: E44, F32, F34, G15, H63

Suggested Citation

Catão, Luis A. V. and Milesi-Ferretti, Gian Maria, External Liabilities and Crises (July 2014). CEPR Discussion Paper No. DP10058. Available at SSRN: https://ssrn.com/abstract=2501531

Luis A. V. Catão (Contact Author)

Inter American Development Bank ( email )

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF) ( email )

700 19th Street NW
Room 9-700
Washington, DC 20431
United States
202-623-7441 (Phone)
202-589-7441 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

United Kingdom

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