Article ID Journal Published Year Pages File Type
964587 Journal of International Money and Finance 2016 24 Pages PDF
Abstract

•We determine which variables to consider as fiscal stress advanced indicators.•We adopt a non-parametric signal approach and estimate probit models.•Financial stress improves the predictability of fiscal vulnerability.

This paper tries to identify the macro-financial imbalances that exposed the euro area countries to fiscal stress before the outbreak of the European debt crises. Contrary to conventional wisdom that interprets fiscal stress in terms of fiscal sustainability, we focus on short-term fiscal vulnerability as reflected by the conditions of debt refinancing in the sovereign bond markets. We find that market-based indicators capturing risk perceptions of sovereign debts have been influenced by the indicators defined in the European Macroeconomic Imbalance Procedure (MIP) and by variables of financial vulnerability. When pricing the risk of sovereign bonds, the holders of government debts take into account not only the macroeconomic imbalances but also factors such as banking distress, corporate bond risk, liquidity risks in the interbank market or the volatility of stock prices.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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