External Stress Early Warning Indicators

Abstract

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.

External Wealth of Nations and Systemic Risk

“…See , Gourinchas and Rey (2014) and Schmitt-Grohe et al (2021) for details. Typically, variations in equity prices are driven by changes in expectations about future income, whereas in the case of fixed income instruments these movements are influenced by changes in market yields and in the perceived creditworthiness of borrowers (Machuca, 2017). 4 Globalization is commonly referred as the phenomenon of increased international trade and deepening financial integration that has intensified since the mid-1980 s (Kose et al, 2006).…”