Leading indicators of fiscal distress: evidence from extreme bounds analysis

Martin Bruns, Tigran Poghosyan

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)
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Abstract

Early warning systems (EWSs) are widely used to assess a country’s vulnerability to fiscal distress. A fiscal distress episode is identified as a period when government experiences extreme funding difficulties. Most EWSs employ a specific set of only fiscal leading indicators predetermined by the researchers, which casts doubt on their robustness. We revisit this issue using extreme bounds analysis, which allows identifying robust leading indicators of fiscal distress from a large set. A robust leading indicator’s effect does not strongly depend on the model specification. Consistent with the theoretical predictions of latest generation crisis models, we find that both fiscal and non-fiscal leading indicators are robust. In addition, we find that a fiscal vulnerability indicator based on fiscal and non-fiscal leading indicators offers a 29% gain in predictive power compared to a traditional one based only on fiscal leading indicators. This suggests that both fiscal and non-fiscal leading indicators should be taken into account when assessing country’s vulnerability to fiscal distress.
Original languageEnglish
Article number13
Pages (from-to)1454-1478
Number of pages26
JournalApplied Economics
Volume50
Issue number13
Early online date7 Sep 2017
DOIs
Publication statusPublished - 2018

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