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475 - An early-detection index of fiscal stress for EU countries
Author(s): Katia Berti, Matteo Salto, Matthieu Lequien, European Commission
An early-detection index of fiscal stress for EU countries
(694 kB) 
Summary for non-specialists(48 kB)
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.
(European Economy. Economic Papers 475. December 2012.
Brussels. PDF. 25pp. Tab. Graph. Ann. Free.)
JEL classification: E62, E65, E66, H62, H63, E21, F32, F34
Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.
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