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"Rules of Thumb" for Sovereign Debt Crises

by Paolo Manasse of the Università di Bologna & the International Monetary Fund, and
Nouriel Roubini of the New York University

March 2005

Abstract: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper contains an empirical investigation of the set of economic and political conditions that are associated with a likely occurrence of a sovereign debt crisis. We use a new statistical approach (Binary Recursive Tree) that allows us to derive a collection of "rules of thumb" that help identify the typical characteristics of defaulters. We find that not all crises are equal: they differ depending on whether the government faces insolvency, illiquidity, or various macroeconomic risks. We also characterize the set of fundamentals that can be associated with a relatively "risk free" zone. This classification is important for discussing appropriate policy options to prevent crises and improve response time and prediction.

JEL Classification: F33, F34, F37.

Keywords: Sovereign debt, crises, default.

Published in: Journal of International Economics, Vol. 78, No. 2, (July 2009), pp. 192-205.

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