The Unassuming Economist

A new IMF working paper finds that “both nonfiscal (external and internal imbalances) and fiscal variables help predict crises among advanced and emerging economies.”

“Our analysis identifies robust indicators of vulnerabilities that can help signal a high probability of the onset of a crisis in the near future. Building early warning indicators that help predict future fiscal crises is inherently difficult, including because countries may take mitigating action as they see the growing vulnerabilities. However, we find that some types of vulnerabilities are consistently relevant to explain fiscal crises. This raises the question why governments do not act as they see signals. In large measure they do, as crises among advanced economies are rare. Still, the occurrence of crises may reflect overly optimistic projections about the future (e.g., economic growth, cost of debt), and as such governments underestimate the risks and fail to take mitigating measures. Another possibility could be that other shocks or crisis (e.g., banking) could lead to fiscal pressures”