Assessing Bias and Accuracy in the World Bank-IMF's Debt Sustainability Framework for Low-Income Countries

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Assessing Bias and Accuracy in the World Bank-IMF's Debt Sustainability Framework for Low-Income Countries
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Volume/Issue:
2014/48
Series:
IMF Working Papers
Author(s):
Andrew Berg, Enrico Berkes, Catherine Pattillo, Andrea Presbitero, and Yorbol Yakhshilikov
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
March 2014
DOI:
http://dx.doi.org/10.5089/9781475579772.001
ISBN:
9781475579772
ISSN:
1018-5941
Page:
39
The World Bank and the IMF have adopted a debt sustainability framework (DSF) to evaluate the risk of debt distress in Low Income Countries (LICs). At the core of the DSF are empirically-based thresholds for each of five different measures of the debt burden (the 'debt threshold approach' DTA). The DSF contains a rule for aggregating the information contained in these five different variables which we label the 'worst-case aggregator' (WCA) in view of the fact that the DSF considers a breach of any one of the thresholds sufficient to indicate a high risk of debt distress. However, neither the DTA nor the WCA has heretofore been subject to empirical testing. We find that: (1) the DTA loses information relative to a simple proposed alternative; (2) the WCA is too conservative (predicting crises too often) in terms of the loss function used in the DSF; and (3) the WCA is less accurate than some simple proposed alternative aggregators as a predictor of debt distress.
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