A toolkit to assess fiscal vulnerabilities and risks in advanced economies

Abstract

This article presents a range of tools and indicators for analysing fiscal vulnerabilities and risks for advanced economies. The analysis covers key short-, medium-and long-term dimensions. Short-term pressures are captured by assessing (i) gross funding needs, (ii) market perceptions of default risk and (iii) stress dependence among sovereigns. Medium-and long-term pressures are summarized by (iv) medium-and long-term budgetary adjustment needs, (v) susceptibility of debt projections to growth and interest rate shocks and (vi) stochastic risks to medium-term debt dynamics. Aiming to cover a wide range of advanced economies and minimize data lags, has also influenced the selection of empirical methods. Due to these features, they can, for example, help inform the joint IMF-FSB Early Warning Exercise (EWE) on the fiscal dimensions of economic risks.

An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study

“…In the case of advanced economies, Schaechter et al (2014) have presented tools and indicators for the analysis of risks and fiscal vulnerabilities associated with advanced economies. The study elaborates short-term pressures could be captured through financing requirements, default risk perspectives in the market and sovereign stress dependence.…”

Fiscal, economic and financial vulnerabilities: implications for Euro area surveillance

“…Public debt as a pastrelated concept sums up historical deficits and in that respect reveals the vulnerability of public finances to interest rate developments on financial markets. That has been stressed by the IMF (Schaechter et al, 2012) and can currently be recognized daily in high-debt Euro area countries' public finances. The public deficit as a dynamic concept indicates the short-term public finance record of an MS at the present and in the very near future and in that respect captures public finance risks only to a limited extent.…”

“…Table 3). Schaechter et al (2012) have added further variables and indicators from other dimensions of the Risk Octagon. In particular, they also consider macroeconomic shocks vis-à-vis the baseline scenario and they include market-based risk variables and indicators as well as indicators for spillover risks (cf.…”

“…real GDP growth -1 pp compared to baseline) Interest rate shocks (e.g. interest rates +100 bps over the medium term) Stochastic simulations: risks to public debt trajectories c Source: Schaechter, A. et al (2012).…”

“…After having Table 4. Toolkit for assessing fiscal vulnerabilities in advanced economies according to Schaechter et al (2012) Short-term financing pressures Gross funding needs (short ± medium term)…”