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Early Warning System for Government Debt Crisis in Developing Countries

Rani Wijayanti () and Sagita Rachmanira ()
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Rani Wijayanti: Bank Indonesia, Indonesia
Sagita Rachmanira: Bank Indonesia, Indonesia

Journal of Central Banking Theory and Practice, 2020, vol. 9, issue special issue, 103-124

Abstract: This study develops an early warning signal (EWS) of government debt crisis using a panel data consisting of 43 developing countries over the period of 1960 to 2017. It employs two different methods: the noise to signal ratio to capture the signaling power of individual indicators; and the binomial logistic regression to construct a more general model. The binomial logistic regression offers a better predictive power relative to the noise to signal ratio. The binomial logistic regression can predict 61.5% of the government debt crisis 2 years in advance. An increase in inflation, government and private debt exposures, external debt to exports, ratio of short-term external debt to foreign exchange reserves, and the ratio of external interest payments to gross national income can signal an upcoming debt crisis. Similarly, a continuous decline in the gross domestic product (GDP) and government consumption also increase the likelihood of government debt crisis.

Keywords: Government debt crisis; Systemic risk; Macroprudential; sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: H63 H68 (search for similar items in EconPapers)
Date: 2020
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Handle: RePEc:cbk:journl:v:9:y:2020:i:si:p:103-124