The Risk of External Financial Crisis

Abstract

This study examines the determinants of external crises using data from 62 countries over 1970-2019 to guide macrofinancial prudential policies. It identifies debt liabilities as the riskiest component of a country's external financial portfolio, with FDI liabilities being half as risky and FDI assets offering significant protection. While macroeconomic imbalances can increase risk, they are not usually crisis drivers. Adverse global shocks amplify domestic risks, but international reserves can mitigate these risks effectively. Advanced economies show greater resilience to these risks. The risk of external crises is generally declining, primarily due to improved external portfolio assets and rising international reserves.

Keywords: External crisis, External balance sheet, International reserves, Macroeconomic imbalances, External debt, foreign direct investment