Are Debt Sustainability Indicators Based on Time-Series Data Useful for Predicting Crises?

Katharina Mersmann and Frank Westermann

FinanzArchiv: Public Finance Analysis, 2020, vol. 76, issue 2, 146-164

Abstract: A large literature in empirical public finance applies time-series techniques to historical data and draws inference about public debt sustainability of individual countries. These methods include unit-root tests on primary deficits and cointegration between revenue and expenditure, as well as fiscal reaction functions. In this note, we take a systematic approach to evaluating the in- and out-of-sample performance of various methods in predicting sovereign debt crises. In a panel-logit regression analysis for 31 countries, we find that the benefits for forecasting are surprisingly small.

Keywords: intertemporal budget constraint; unit roots; cointegration; fiscal reaction function (search for similar items in EconPapers)
JEL-codes: E62 H6 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1628/fa-2020-0002

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