Are debt sustainability indicators based on time-series data useful for predicting crises? Katharina Mersmann and Frank Westermann
By: Mersmann, Katharina
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Contributor(s): Westermann, Frank.
Material type: 
ArticlePublisher: 2020Subject(s): DEUDA PUBLICA | SOSTENIBILIDAD FISCAL | COINTEGRACION
In:
FinanzArchiv v. 76, n. 2, June 2020, 146-164Summary: 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.
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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.
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