Gregor von Schweinitz

Macroeconomic Imbalances as Indicators for Debt Crises in Europe

European authorities and scholars published proposals on which indicators of macroeconomic imbalances might be used to uncover risks for the sustainability of public debt in the European Union. In this article the ability of four proposed sets of indicators to send early warnings of debt crises is tested using a signals approach for the study of indicators and the construction of composite indicators. It is found that a broad composite indicator has the highest predictive power. This fact still holds true if equal weights are used for the construction of the composite indicator in order to reflect the uncertainty about the origin of future crises.

Real Effective Exchange Rate Misalignment in the Euro Area: A Counterfactual Analysis

Were real effective exchange rates (REER) of Euro area member countries drastically misaligned at the outbreak of the global financial crisis? The answer is difficult to determine because economic theory gives no simple guideline for determining the equilibrium values of real exchange rates, and the determinants of those values might have been distorted as well. To overcome these limitations, we use synthetic matching to construct a counterfactual economy for each member as a linear combination of a large set of non-Euro area countries. We find that Euro area crisis countries are best described by a mixture of advanced and emerging economies. Comparing the actual REER with those of the counterfactuals gives sensible estimates of the misalignments at the start of the crisis: All peripheral countries were strongly overvalued, while high undervaluation is only observed for Finland.

Qual VAR revisited: Good forecast, bad story

Due to the recent financial crisis, the interest in econometric models that allow to incorporate binary variables (such as the occurrence of a crisis) experienced a huge surge. This paper evaluates the performance of the Qual VAR, originally proposed by Dueker (2005). The Qual VAR is a VAR model including a latent variable that governs the behavior of an observable binary variable. While we find that the Qual VAR performs reasonable well in forecasting (outperforming a probit benchmark), there are substantial identification problems even in a simple VAR specification. Typically, identification in economic applications is far more difficult than in our simple benchmark. Therefore, when the economic interpretation of the dynamic behavior of the latent variable and the chain of causality matter, use of the Qual VAR is inadvisable.