Economic resilience: A new set of vulnerability indicators for OECD countries

The high costs of crises underscore the need to strengthen the resilience of economies, notably by assessing early on potential vulnerabilities that can lead to such costly events. This paper first discusses the source and nature of potential vulnerabilities in OECD countries that can lead to costly economic crises. Based on the most recent evidence from the early warning literature and lessons learned from the global financial crisis, it then proposes a new dataset of more than 70 vulnerability indicators that could be monitored to assess country risks in OECD economies. The indicators are grouped into five domestic areas: i) financial sector imbalances, ii) non-financial sector imbalances, iii) asset market imbalances, iv) public sector imbalances and v) external sector imbalances. An additional international “spillovers, contagion and global risks” category aims at capturing vulnerabilities that could transmit from one country to another through financial, trade or confidence channels. Evidence in a companion paper (Hermansen and Röhn, 2015) shows that the majority of the proposed indicators for which sufficiently long time series exists is helpful in predicting severe recessions and crises in the 34 OECD economies and Latvia between 1970 and 2014.