An early-detection index of fiscal stress for EU countries

Katia Berti, Matteo Salto and Matthieu Lequien

No 475, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: The financial and economic crisis has generated renewed interest, especially among policy-makers, in early-warning systems that could help identifying fiscal and macro-financial vulnerabilities potentially triggering risks. Against this background, this paper presents an early-warning index of fiscal stress, incorporating fiscal, financial and competitiveness variables, some of which are common to the scoreboard used in the EU for the surveillance of macroeconomic imbalances. Thresholds of fiscal risk are determined, based on the non-parametric signals approach, for the overall index, the two sub-indexes grouping fiscal and financial-competitiveness variables and each individual variable used in the analysis. Values of the overall index beyond its critical threshold pinpoint to potential risks of fiscal stress in the short run, while the analysis at individual variable level allows identifying possible sources of vulnerabilities, which is key to design appropriate risk-mitigating policies. The results obtained highlight the importance of incorporating financial-competitiveness variables in an early-warning system for fiscal stress, as such variables appear to be better "leading indicators" of fiscal stress than fiscal variables are. The results also speak in favour of using an early-warning composite indicator of fiscal stress, rather than looking at the individual variables taken in isolation. Results obtained by applying the proposed methodology to EU countries are presented in the last part of the paper.

JEL-codes: E21 E62 E65 E66 F32 F34 H62 H63 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2012-12
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:euf:ecopap:0475

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