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The financial stability index (3) – Estimated by the Institute of Financial Studies

Author

Listed:
  • Ion Stancu

    (Institute of Financial Studies Bucharest)

  • Andrei Tudor Stancu

    (Norwich Business School, UK)

  • Iulian Panait

    (Financial Supervisory Authority)

Abstract

There is a vast literature on developing a composite index of relevant macroeconomic indicators that predicts the real economic growth. This is of great importance not only for international financial institutions (e.g. IMF, ECB), central banks, and financial supervisory authorities, but also for the private sector (credit rating agencies). Our goal is to build a Financial Stability Index (FSI) or financial stress index that tracks economic growth in Romania. We constructed a composite index using a linear combination of financial variables that are considered to have a significant impact on economic activity. These financial variables are weighted with respect to their cumulated two quarters impulse response on GDP growth, as estimated by a VAR model. Developing such a composite index of financial stability or financial stress has two main utilities: • The analysis of the correlation between financial variables and the real economy placed in the context of different historical episodes of financial crisis. Also, this correlation analysis reveals, in each period, the significant positive or negative contribution of each financial variable to real economic growth. Following this analysis, the FSI can measure the impact of economic and financial policy measures aimed at mitigating financial crises. • The short-term prediction of real economic growth estimated by forecasting the next period evolution of the real economic activity (GDPt+1) using current period GDPt and FSIt. Keywords: composite index, financial stress index, economic growth, VAR model, shortterm prediction JEL Classification: E63; G01; G28

Suggested Citation

  • Ion Stancu & Andrei Tudor Stancu & Iulian Panait, 2017. "The financial stability index (3) – Estimated by the Institute of Financial Studies," Scientific Papers 0001, Institute of Financial Studies.
  • Handle: RePEc:fst:wpaper:0001
    as

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    References listed on IDEAS

    as
    1. Dimitrios P. Louzis & Angelos T. Vouldis, 2013. "A financial systemic stress index for Greece," Working Papers 155, Bank of Greece.
    2. Giang Ho & Yinqiu Lu, 2013. "A Financial Conditions Index for Poland," IMF Working Papers 13/252, International Monetary Fund.
    3. Albulescu Claudiu Tiberiu, 2008. "Utilizarea unui indice agregat pentru măsurarea stabilităţii sectorului financiar din România," Revista OEconomica, Romanian Society for Economic Science, Revista OEconomica, issue 02, June.
    4. Darracq Pariès, Matthieu & Maurin, Laurent & Moccero, Diego, 2014. "Financial conditions index and credit supply shocks for the euro area," Working Paper Series 1644, European Central Bank.
    5. Thomas J. Sargent, 1979. "Estimating vector autoregressions using methods not based on explicit economic theories," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    composite index; financial stress index; economic growth; VAR model; shortterm prediction;

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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