Assessing Fiscal Stress

Abstract

This paper develops a new index which provides early warning signals of fiscal sustainability problems for advanced and emerging economies. Unlike previous studies, the index assesses the determinants of fiscal stress periods, covering public debt default as well as near-default events. The fiscal stress index depends on a parsimonious set of fiscal indicators, aggregated using the approach proposed by Kaminsky, Lizondo and Reinhart (1998). The index is used to assess the build up of fiscal stress over time since the mid-1990s in advanced and emering economies. Fiscal stress has increased recently to record-high levels in advanced countries, reflecting raising solvency risks and financing needs. In emerging economies, risks are lower than in mature economies owing to sounder fiscal fundamentals, but fiscal stress remains higher than before the crisis.Developed countries;Developing countries;Economic models;Fiscal sustainability;Sovereign debt;fiscal stress, public debt, fiscal indicators, fiscal crisis, fiscal variables, debt default, government debt, fiscal distress, fiscal crises, debt crises, short-term debt, fiscal vulnerability, external debt, sovereign bond, sovereign default, public debt crises, currency crises, debt defaults, fiscal solvency, fiscal adjustment, current account, fiscal policy, currency debt, sovereign debt crises, fiscal affairs, debt obligations, external borrowing, debt restructuring, fiscal affairs department, fiscal risks, short term debt, foreign currency debt, repayment capacity, fiscal outlook, official creditors, domestic currency, fiscal policies, reserve bank, debt exchanges, debt maturity, fiscal difficulties, fiscal data, debt management, domestic public debt, national debt, domestic investor, net debt, currency crisis, debt structure, currency risk, fiscal pressure, deficit financing, fiscal component, fiscal factors, fiscal risk, debt default episodes, currency composition