Macroeconomic Imbalances as Indicators for Debt Crises in Europe

Abstract:
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.