Exogenous Shocks and Growth Crises in Low-Income Countries: A Vulnerability Index

Abstract

This paper develops a new index which provides early warning signals of a growth crisis in the event of large external shocks in low-income countries (LICs). Multivariate regression analysis and a univariate signaling approach are used to map information from a parsimonious set of underlying policy, structural, and institutional indicators into a composite vulnerability index. Both the in-sample and out-of-sample predictive power of the index are high. In particular, it explains well the growth crises observed in LICs during the global financial crisis.