Financial stress and economic activity in Germany and the Euro Area
AbstractThe financial crisis 2008-2009 and the European sovereign debt crisis have shown that stress on financial markets is important for analyzing and forecasting economic activity. Since financial stress is not directly observable but is presumably reflected in many financial market variables, it is useful to derive an indicator summarizing the stress component of these variables. Therefore, I derive a financial market stress indicator (FMSI) for Germany and the Euro Area using a dynamic approximate factor model. Subsequently, applying these indicators, I analyse the effects of financial stress on economic activity in a small Bayesian VAR model. An increase in financial stress leads to a significant dampening of GDP growth and the inflation rate. Additionally, there is a substantial and persistent decline in short-term nominal interest rates. I find that about fifteen percent of variation in real GDP growth can be accounted for variations in financial stress for Germany and about 30 percent in the Euro Area. I show that the inclusion of the indicator significantly improves out-of-sample forecasting accuracy for real GDP growth in Germany compared to a model without the indicator and other forecast benchmarks
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1743.
Length: 37 pages
Date of creation: Nov 2011
Date of revision:
Forecasting; Financial stress indicator; Financial Systems; Recessions; Slowdowns; Financial Crises;
Find related papers by JEL classification:
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F3 - International Economics - - International Finance
- G2 - Financial Economics - - Financial Institutions and Services
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-28 (All new papers)
- NEP-CBA-2011-11-28 (Central Banking)
- NEP-EEC-2011-11-28 (European Economics)
- NEP-FOR-2011-11-28 (Forecasting)
- NEP-MAC-2011-11-28 (Macroeconomics)
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- Sofiane Aboura & Björn van Roye, 2013. "Financial stress and economic dynamics: an application to France," Kiel Working Papers 1834, Kiel Institute for the World Economy.
- Boysen-Hogrefe, Jens & Gern, Klaus-Jürgen & Jannsen, Nils & Plödt, Martin & van Roye, Björn & Scheide, Joachim & Groll, Dominik & Kooths, Stefan, 2012. "Weltkonjunktur und deutsche Konjunktur im Winter 2012," Kiel Discussion Papers 514/515, Kiel Institute for the World Economy (IfW).
- Mittnik, Stefan & Semmler, Willi, 2013.
"The real consequences of financial stress,"
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Elsevier, vol. 37(8), pages 1479-1499.
- Holló, Dániel & Kremer, Manfred & Lo Duca, Marco, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series 1426, European Central Bank.
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