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Beyond Financial Conditions: Measuring Structural Vulnerabilities in the U.S. Financial System

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Abstract

We introduce the Financial Vulnerability Index (FVI), a novel indicator of financial vulnerabilities in the U.S. Unlike financial condition indices, which measure current credit market conditions and spike during periods of financial turmoil, the FVI displays the gradual build-up of structural financial weaknesses and declines as such episodes materialize. We demonstrate that the FVI exhibits properties consistent with theoretical mechanisms of financial vulnerabilities. When the index is high, adverse shocks are substantially amplified, generating larger declines in consumption and investment. We provide new empirical evidence that monetary tightening is associated with gradual declines in the FVI, with this effect substantially delayed, taking a few years to fully materialize. Moreover, monetary policy transmission to prices depends on the state of financial vulnerabilities, with significantly stronger effects when vulnerabilities are low.

Suggested Citation

  • Michele Modugno & Benjamin Roscoe & Sarah Zoi, 2026. "Beyond Financial Conditions: Measuring Structural Vulnerabilities in the U.S. Financial System," Finance and Economics Discussion Series 2026-065, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:103791
    DOI: 10.17016/FEDS.2026.065
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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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