Early Warning System of Government Debt Crises

29 Pages Posted: 23 Mar 2018

See all articles by Christian Dreger

Christian Dreger

European University Viadrina Frankfurt (Oder); IZA Institute of Labor Economics; Chinese Academy of Social Sciences (CASS)

Konstantin A. Kholodilin

German Institute for Economic Research (DIW Berlin)

Date Written: March 2018

Abstract

The European debt crisis has revealed serious deficiencies and risks on a proper functioning of the monetary union. Against this backdrop, early warning systems are of crucial importance. In this study that focuses on euro area member states, the robustness of early warning systems to predict crises of government debt is evaluated. Robustness is captured via several dimensions, such as the chronology of past crises, econometric methods, and the selection of indicators in forecast combinations. The chosen approach is shown to be crucial for the results. Therefore, the construction of early warning systems should be based on a wide set of variables and methods in order to be able to draw reliable conclusions.

Keywords: Sovereign debt crises, multiple bubbles, signal approach, logit, panel data model

JEL Classification: C23, C25, H63

Suggested Citation

Dreger, Christian and Kholodilin, Konstantin A., Early Warning System of Government Debt Crises (March 2018). DIW Berlin Discussion Paper No. 1724, Available at SSRN: https://ssrn.com/abstract=3146762 or http://dx.doi.org/10.2139/ssrn.3146762

Christian Dreger

European University Viadrina Frankfurt (Oder) ( email )

Frankfurt (Oder)
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Chinese Academy of Social Sciences (CASS) ( email )

Beijing, 100732
China

Konstantin A. Kholodilin (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

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