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Predicting Fiscal Crises: A Machine Learning Approach

Summary:
Klaus-Peter Hellwig of IMF in this working paper: In this paper I assess the ability of econometric and machine learning techniques to predict fiscal crises out of sample. I show that the econometric approaches used in many policy applications cannot outperform a simple heuristic rule of thumb. Machine learning techniques (elastic net, random forest, gradient boosted trees) deliver significant improvements in accuracy. Performance of machine learning techniques improves further, particularly for developing countries, when I expand the set of potential predictors and make use of algorithmic selection techniques instead of relying on a small set of variables deemed important by the literature. There is considerable agreement across learning algorithms in the set of selected

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Klaus-Peter Hellwig of IMF in this working paper:

In this paper I assess the ability of econometric and machine learning techniques to predict fiscal crises out of sample. I show that the econometric approaches used in many policy applications cannot outperform a simple heuristic rule of thumb. Machine learning techniques (elastic net, random forest, gradient boosted trees) deliver significant improvements in accuracy.

Performance of machine learning techniques improves further, particularly for developing countries, when I expand the set of potential predictors and make use of algorithmic selection techniques instead of relying on a small set of variables deemed important by the literature.

There is considerable agreement across learning algorithms in the set of selected predictors: Results confirm the importance of external sector stock and flow variables found in the literature but also point to demographics and the quality of governance as important predictors of fiscal crises. Fiscal variables appear to have less predictive value, and public debt matters only to the extent that it is owed to external creditors.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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