Economic and Financial Vulnerability: Proposal for a Multidimensional Index through Dimensionality Reduction

Abstract

Economic and financial vulnerability (EFV) is a condition that affects the macroeconomic stability of countries, especially in emerging economies, in the face of external or internal shocks. This paper proposes the construction of a multidimensional FEV index using dimensionality reduction techniques, particularly Principal Component Analysis (PCA). Based on data from Latin American countries in the period 2018–2023, a synthetic index is constructed that summarizes key variables such as public debt, inflation, international reserves, trade balance, among others. The results allow countries to be classified according to their level of vulnerability, facilitating decision-making for the design of public policies aimed at economic resilience.