Friday, January 27, 2012

Which EM economies are most likely to be in trouble?

The Economist has constructed a policy room index. It is intended to measure how much monetary and fiscal space economies have to conduct policy. The index has six components: inflation, excess credit (the growth in bank lending minus the growth in nominal GDP), real interest rates, currency movements, current-account balances, and a "fiscal flexibility index." The combine those inputs to produce an overall "wiggle-room index."

This reminds me a lot of another index The Economist put together a few months ago: the overheading index.

I combined the two indices to find which countries are in "most trouble" (i.e. high risk of overheating and little wiggle room). I set the threshold at 70, for both indices. I find that the trouble spots are: Brazil, Argentina, India, Vietnam, and Turkey.

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