A Macroeconomic Vulnerability Model for the Euro Area

40 Pages Posted: 12 Aug 2019

See all articles by David Sondermann

David Sondermann

European Central Bank (ECB)

Nico Zorell

European Central Bank (ECB)

Date Written: August, 2019

Abstract

Macroeconomic imbalances increase the vulnerability of an economy to adverse shocks, which in turn can lead to crises with severe economic and social costs. We propose an early warning model that predicts such crises. We identify a set of macroeconomic indicators capturing domestic and external imbalances that jointly predict severe recessions (i.e. growth crises) in a multivariate discrete choice framework. The approach allows us to quantify an economy's macroeconomic vulnerabilities at any point in time. In particular, the model would have pointed early on to emerging vulnerabilities in all the euro area countries that registered severe recessions in the years after 2007. We also show that the model can be applied beyond the euro area crisis in that its main results remain robust to changes in assumptions and sample composition.

Keywords: early warning models, growth crises, macroeconomic imbalances

JEL Classification: E37, E44, F47, O52

Suggested Citation

Sondermann, David and Zorell, Nico, A Macroeconomic Vulnerability Model for the Euro Area (August, 2019). Available at SSRN: https://ssrn.com/abstract=3436065 or http://dx.doi.org/10.2139/ssrn.3436065

David Sondermann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Nico Zorell

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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