IMF Working Papers

When Do We Repair the Roof? Insights from Responses to Fiscal Crisis Early Warning Signals

By Jiro Honda, Rene Tapsoba, Ismael Issifou

April 6, 2018

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Jiro Honda, Rene Tapsoba, and Ismael Issifou. When Do We Repair the Roof? Insights from Responses to Fiscal Crisis Early Warning Signals, (USA: International Monetary Fund, 2018) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Should policymakers wait for fiscal crisis early warning signals before repairing the roof? We give an answer to this question by investigating the interlinkages between early warning signals for fiscal crisis, policy responses, and policy outcomes, using a broad panel of 119 countries. We find that fiscal adjsutment is a good remedy for countries that act proactively, reducing their likelihood of facing fiscal crisis by up to about 60 percent. For those waiting for wake-up calls from early-detection tools, however, fiscal adjustment may not fully prevent fiscal crisis occurrence, with the chance of fiscal crisis prevention not only smaller (about 30 percent) but also statistically not significant. These findings highlight the prominence of repairing the roof when the sun is shining, particularly in countries with weak institutions.

Subject: Crisis prevention, Early warning systems, Fiscal consolidation, Fiscal rules, Public and publicly-guaranteed external debt

Keywords: Crisis, Crisis occurrence, Fiscal crisis, WP

Publication Details

  • Pages:

    37

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2018/077

  • Stock No:

    WPIEA2018077

  • ISBN:

    9781484350652

  • ISSN:

    1018-5941

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