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External Liabilities and Crises
Author:
Mr. Luis Catão
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and
Mr. Gian M Milesi-Ferretti
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Series:
IMF Working Papers
Volume/Issue:
Volume 2013: Issue 113
Language:
English
Publication Date:
16 May 2013
DOI:
https://doi.org/10.5089/9781484315910.001
ISBN:
9781484315910
ISSN:
1018-5941
Pages:
37
Keywords:
WP; GDP; crisis risk; International Investment Positions; Sovereign Debt; Currency Crises; Current Account Imbalances; Foreign Exchange Reserves; crisis definition; GDP coefficient; FDI liability; crisis probability; Current account; Foreign direct investment; Current account balance; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970-2011, we find that the ratio of net foreign liabilities (NFL) to GDP is a significant crisis predictor, and the more so when it exceeds 50 percent in absolute terms and 20 percent of the country-specific historical mean. This is primarily due to net external debt--the effect of net equity liabilities is weaker and net FDI liabilities seem if anything an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor, either measured unconditionally or as deviations from conventionally estimated “norms” iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises stricto sensu.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund