Financial stress: what is it, how can it be measured, and why does it matter?
The U.S. economy is currently experiencing a period of significant financial stress. This stress has contributed to the downturn in the economy by boosting the cost of credit and making businesses, households, and financial institutions highly cautious. To alleviate the financial stress and counteract its effects on the economy, the Federal Reserve has reduced the federal funds rate target substantially and undertaken unprecedented actions to support the functioning of financial markets. There will come a point, however, when the Federal Reserve needs to remove liquidity from the economy and unwind special lending programs to ensure a return to sustainable growth with low inflation. ; In past recoveries, the decision when to tighten policy was based mainly on the strength of business and consumer spending and the degree of upward pressure on prices and wages. An additional element in the current exit strategy will be determining if financial stress is no longer high enough to endanger economic recovery. As financial conditions begin to improve, the various measures of financial stress that the Federal Reserve monitors may give mixed signals. In this situation, policymakers would greatly benefit from having a single, comprehensive index of financial stress. Such an index could also prove valuable further down the road, when the Federal Reserve might again need to decide whether financial stress was serious enough to warrant special attention. ; Hakkio and Keeton present a new index of financial stress--the Kansas City Financial Stress Index (KCFSI). They explain how the components of the KCFSI capture key aspects of financial stress and show that high values of the KCFSI have tended to coincide with known periods of financial stress. They also show that the KCFSI provides valuable information about future economic growth.
Volume (Year): (2009)
Issue (Month): Q II ()
|Contact details of provider:|| Postal: |
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
- Brunnermeier, Markus K & Pedersen, Lasse Heje, 2007.
"Market Liquidity and Funding Liquidity,"
CEPR Discussion Papers
6179, C.E.P.R. Discussion Papers.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market Liquidity and Funding Liquidity," NBER Working Papers 12939, National Bureau of Economic Research, Inc.
- Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
- Carlson Mark A & King Thomas & Lewis Kurt, 2011.
"Distress in the Financial Sector and Economic Activity,"
The B.E. Journal of Economic Analysis & Policy,
De Gruyter, vol. 11(1), pages 1-31, June.
- Mark A. Carlson & Thomas B. King & Kurt F. Lewis, 2009. "Distress in the financial sector and economic activity," Finance and Economics Discussion Series 2009-01, Board of Governors of the Federal Reserve System (U.S.).
- Mark A. Carlson & Thomas B. King & Kurt F. Lewis, 2008. "Distress in the financial sector and economic activity," Finance and Economics Discussion Series 2008-43, Board of Governors of the Federal Reserve System (U.S.).
- Ricardo J. Caballero & Arvind Krishnamurthy, 2008.
"Collective Risk Management in a Flight to Quality Episode,"
Journal of Finance,
American Finance Association, vol. 63(5), pages 2195-2230, October.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2007. "Collective Risk Management in a Flight to Quality Episode," NBER Working Papers 12896, National Bureau of Economic Research, Inc.
- Mark Gertler & Cara S. Lown, 2000.
"The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications,"
NBER Working Papers
7549, National Bureau of Economic Research, Inc.
- Gertler, Mark & Lown, Cara S, 1999. "The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 132-50, Autumn.
- Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
- Charles Calomiris & Joseph Mason, 2004.
"Credit Card Securitization and Regulatory Arbitrage,"
Journal of Financial Services Research,
Springer, vol. 26(1), pages 5-27, August.
- Charles W. Calomiris & Joseph R. Mason, 2003. "Credit card securitization and regulatory arbitrage," Working Papers 03-7, Federal Reserve Bank of Philadelphia.
- Connolly, Robert & Stivers, Chris & Sun, Licheng, 2005. "Stock Market Uncertainty and the Stock-Bond Return Relation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 161-194, March.
- Virginie Coudert & Mathieu Gex, 2007.
"Does Risk Aversion Drive Financial Crises? Testing the Predictive Power of Empirical Indicators,"
2007-02, CEPII research center.
- Coudert, Virginie & Gex, Mathieu, 2008. "Does risk aversion drive financial crises? Testing the predictive power of empirical indicators," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 167-184, March.
- Manmohan S. Kumar & Avinash Persaud, 2001. "Pure Contagion and Investors Shifting Risk Appetite; Analytical Issues and Empirical Evidence," IMF Working Papers 01/134, International Monetary Fund.
- Jesus Gonzalo & Jose Olmo, 2005. "Contagion Versus Flight To Quality In Financial Markets," Economics Working Papers we051810, Universidad Carlos III, Departamento de Economía.
- Dimitri Vayanos, 2004.
"Flight to quality, flight to liquidity, and the pricing of risk,"
LSE Research Online Documents on Economics
456, London School of Economics and Political Science, LSE Library.
- Dimitri Vayanos, 2004. "Flight to Quality, Flight to Liquidity, and the Pricing of Risk," NBER Working Papers 10327, National Bureau of Economic Research, Inc.
- Haq, Mamiza & Heaney, Richard, 2009. "European bank equity risk: 1995-2006," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 274-288, April.
- Kurz, Mordecai, 2008. "Beauty contests under private information and diverse beliefs: How different?," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 762-784, July.
- John V. Duca, 1999. "What credit market indicators tell us," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 2-13.
When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:2009:i:qii:p:5-50:n:v.94no.2. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LDayrit)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.