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

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  • Katharina Mersmann
  • Frank Westermann

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.

Suggested Citation

  • Katharina Mersmann & Frank Westermann, 2020. "Are Debt Sustainability Indicators Based on Time-Series Data Useful for Predicting Crises?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 76(2), pages 146-164.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2020-0002
    DOI: 10.1628/fa-2020-0002
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    More about this item

    Keywords

    intertemporal budget constraint; unit roots; cointegration; fiscal reaction function;
    All these keywords.

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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