External Stress Early Warning Indicators

29 Pages Posted: 3 Oct 2017

Date Written: October 2, 2017


We examine the determinants of external stress episodes through probit analysis, focusing on the role of foreign liabilities in order to build an external crisis early warning indicator for a set of selected EMU countries. We use a panel country data spanning 1970-2011 from External Wealth Dataset (Phillip Lane). Our results show that the ratio of net and gross foreign liabilities to GDP and current account balances — which measure external debt accumulation speed — are significant stress predictors, although (net) FDI liabilities seem an offset factor. Early warning indicators are based on a signalling approach and exploit panel dimension of the data to develop a country specific indicator. We find that EMU peripheral countries’ external indebtedness remains higher than risk threshold, in spite of the external adjustment accumulated in the last years in some countries. This result highlights the necessity of going on structural reforms that reinforce competitiveness of these economies.

Keywords: International investment positions, external debt, external vulnerability, current account imbalances

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

Suggested Citation

Machuca, César Martín, External Stress Early Warning Indicators (October 2, 2017). Banco de Espana Working Paper No. 1733, Available at SSRN: https://ssrn.com/abstract=3046464 or http://dx.doi.org/10.2139/ssrn.3046464

César Martín Machuca (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014

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