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The Latvian financial stress index as an important element of the financial system stability monitoring framework

Author

Listed:
  • Nadežda Sinenko

    (Monetary Policy Department, Bank of Latvia)

  • Deniss Titarenko

    (Monetary Policy Department, Bank of Latvia)

  • Mikus Arinš

    (Monetary Policy Department, Bank of Latvia)

Abstract

The objective of this paper is to develop a methodology for the Latvian financial stress index (FSI). To this effect, the particular methodologies widely used in international practice for composite indicators applied in financial stability monitoring and the experience of selected countries were examined. The authors analyse the nature of financial stress and the related symptoms and offer their interpretation of the financial stress concept. The paper provides the rationale behind the selection of the individual indicators (components) comprised in the FSI and evaluates various options for aggregating FSI components. The main conclusion presented in the paper is that the dynamics of the FSI developed on the basis of the methodology proposed by the authors of the paper is quite an accurate measure of changes in Latvian financial system stress levels. It signals periods of elevated stress as well as periods of an excessively vigorous and imbalanced development of the financial system. The Bank of Latvia has been using the FSI as one of the elements of Latvia's financial system stability monitoring framework since 2010.

Suggested Citation

  • Nadežda Sinenko & Deniss Titarenko & Mikus Arinš, 2013. "The Latvian financial stress index as an important element of the financial system stability monitoring framework," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 13(2), pages 85-110, December.
    • Handle: RePEc:bic:journl:v:13:y:2013:i:2:p:85-110
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    References listed on IDEAS

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    Cited by:

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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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