Performance of the Macroeconomic Imbalance Procedure in light of historical experience in the CEE region

Abstract

This article applies set of 24 baseline and auxiliary indicators included into the Macroeconomic Imbalance Procedure framework on the conditions of 17 CEE countries to assess their predictive power given the policy pre-determined and optimal thresholds for the period 1991–2014. Our results suggest that the optimal official thresholds might either be excessively too accommodative (public and private, total or external debt levels), overly conservative (current account balance, export market share and nominal unit labour costs), or with less informative value (labour market characteristics) for set of transition economies. Indicators with higher predictive power belong predominantly to the group of external imbalances indicators.

Keywords:

• early warning indicators
• macroeconomic imbalance procedure
• CEE region

JEL classifications:

• G01
• F47
• F53

Acknowledgments

Thanks are due to seminar participants at the National Bank of Slovakia for several valuable comments, with special thanks going to Mr Gertler, Mr Suster and Mr Toth. We also extend our gratitude to Mr Domonkos, Mr Ostrihon and Ms Sikulova.

Notes

1. We are considering wider set of 17 CEE countries (Central and Eastern European Countries) in this paper. Detailed information are available in the Appendix 2 in Supplemental data.

2. We calculate AUROC score for all possible combinations of time lag and time window during which an event might occur with cap set on three years for both lag and time window. While this allows for differentiating between late and ultra-early indicators by searching for optimum lag-window combination outcomes might be biased due to corresponding reduction of the data-set by excluding last year observations.

3. Since the calculation of the AUROC score is based on ratio of true and false warning rate, it might happen that for specific years the AUROC score cannot be computed. This might occur in a case when there does not exist a combination when EWI issued a signal that did not indicated a crisis (B). In our sample this describes a situation in 2005–2007 period when crisis was either indicated in all cases or every no-crisis event left was correctly predicted.

4. The most recent report by the European Commission (European Commission 2016, 31) does not provide any clear direction how to empirically capture the notion of macroeconomic imbalances but rather uses a very vague definition of “trends or states that could jeopardise macroeconomic stability if not corrected.”