Incidence and Duration of Fiscal Crises: Macroeconomic Determinants
Hemantha K.J. Ekanayake
Dr. (Ms.) Hemantha Ekanayake is a Senior Economist attached to the Economic Research Department of the Central Bank of Sri Lanka. She received a B.Sc. Honours degree in Agriculture from the University of Ruhuna, Sri Lanka. She also received a M.Sc. degree in International and Development Economics and a Ph.D. degree in Economics from the Australian National University, Australia. Her research interests are in the fields of Fiscal Monetary Interrelations and Macroeconomic Modeling.
This paper examines the determinants of the incidence and duration of fiscal crises for a large sample of developed and developing countries using multivariate probit and survival models, for the period from 1975 to 2010. Overall, the findings suggest that most of the economic fundamentals that trigger crises, do not necessarily lengthen the duration of a crisis except for high levels of foreign reserves, which are associated with a lower probability of fiscal crises incidence as well as faster recovery from a crisis. Moreover, the paper argues for greater capital account openness and for inflation targeting regimes, since it identifies these two as important mechanisms through which fiscal discipline can be improved, which, in turn, contributes towards avoiding fiscal crises.