A Multinomial Approach to Early Warning Systems for Debt Crises

38 Pages Posted: 10 Jul 2006

Date Written: May 2006

Abstract

This paper develops an early warning system for sovereign debt crises, broadly defined as episodes of outright default, failure of a country to be current on external obligations and substantial access to IMF resources. It estimates a multinomial logit model that makes it possible to differentiate between three regimes labelled 'tranquil', 'pre-crisis' and 'adjustment'. The model includes a large set of macroeconomic variables and is able to predict, in-sample, 78 percent of onsets of crisis while sending false alarms in 34 percent of tranquil cases; its out-of-sample performance is very similar, with 70 percent of entries into crisis correctly predicted and 20 percent of tranquil cases triggering false alarms.

Keywords: emerging markets, early warning systems, debt crises, default

JEL Classification: H63, E66

Suggested Citation

Trebeschi, Giorgio and Ciarlone, Alessio, A Multinomial Approach to Early Warning Systems for Debt Crises (May 2006). Bank of Italy Temi di Discussione (Working Paper) No. 588. Available at SSRN: https://ssrn.com/abstract=914506 or http://dx.doi.org/10.2139/ssrn.914506

Giorgio Trebeschi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessio Ciarlone

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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