Assessing Bias and Accuracy in the World Bank-IMF's Debt Sustainability Framework for Low-Income Countries
The World Bank and IMF have adopted a debt sustainability framework to evaluate the risk of debt distress in Low Income Countries
Abstract
The World Bank and the IMF have adopted a debt sustainability framework (DSF) to evaluate the risk of debt distress in Low Income Countries (LICs). At the core of the DSF are empirically-based thresholds for each of five different measures of the debt burden (the “debt threshold approach” DTA). The DSF contains a rule for aggregating the information contained in these five different variables which we label the “worst-case aggregator” (WCA) in view of the fact that the DSF considers a breach of any one of the thresholds sufficient to indicate a high risk of debt distress. However, neither the DTA nor the WCA has heretofore been subject to empirical testing. The authors find that:
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the DTA loses information relative to a simple proposed alternative
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the WCA is too conservative (predicting crises too often) in terms of the loss function used in the DSF
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the WCA is less accurate than some simple proposed alternative aggregators as a predictor of debt distress.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Citation
Andrew Berg, Enrico G Berkes, Catherine A Pattillo, Andrea Presbitero, Yorbol Yakhshilikov (2014) Assessing Bias and Accuracy in the World Bank-IMF’s Debt Sustainability Framework for Low-Income Countries. IMF Working Paper No. 14/48