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Canadian Financial Stress and Macroeconomic Conditions

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  • Thibaut Duprey

Abstract

I construct a new composite measure of systemic financial market stress for Canada. Compared with existing measures, it better captures the 1990 housing market correction and more accurately reflects the absence of diversification opportunities during systemic events. The index can be used for monitoring. For instance, it reached a peak during the COVID-19 pandemic second only to the 2008 global financial crisis. The index can also be used to introduce non-linear macrofinancial dynamics in empirical macroeconomic models of the Canadian economy. Macroeconomic conditions are shown to deteriorate significantly when the Canadian financial stress index is above its 90th percentile.

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  • Thibaut Duprey, 2020. "Canadian Financial Stress and Macroeconomic Conditions," Discussion Papers 2020-4, Bank of Canada.
    • Handle: RePEc:bca:bocadp:20-4
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    References listed on IDEAS

    as
    1. Chatterjee, Somnath & Chiu, Jeremy & Hacioglu-Hoke, Sinem & Duprey, Thibaut, 2017. "A financial stress index for the United Kingdom," Bank of England working papers 697, Bank of England.
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    3. repec:ecb:ecbwps:20111426 is not listed on IDEAS
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    9. Cameron MacDonald & Maarten van Oordt & Robin Scott, 2016. "Implementing Market-Based Indicators to Monitor Vulnerabilities of Financial Institutions," Staff Analytical Notes 16-5, Bank of Canada.
    10. Thibaut Duprey & Alexander Ueberfeldt, 2020. "Managing GDP Tail Risk," Staff Working Papers 20-3, Bank of Canada.
    11. Duprey, Thibaut & Klaus, Benjamin & Peltonen, Tuomas, 2017. "Dating systemic financial stress episodes in the EU countries," Journal of Financial Stability, Elsevier, vol. 32(C), pages 30-56.
    12. Franklin Allen & Elena Carletti, 2013. "What Is Systemic Risk?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45, pages 121-127, August.
    13. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
    14. Rocco Huang & Mr. Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 2009/152, International Monetary Fund.
    15. Scott Brave & R. Andrew Butters, 2012. "Diagnosing the Financial System: Financial Conditions and Financial Stress," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 191-239, June.
    16. Nathan S. Balke, 2000. "Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 344-349, May.
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    Cited by:

    1. Boissay, Frederic & Collard, Fabrice & Manea, Cristina & Shapiro, Adam, 2023. "Monetary Tightening, Inflation Drivers and Financial Stress," CEPR Discussion Papers 18694, C.E.P.R. Discussion Papers.
    2. James Chapman & Ajit Desai, 2021. "Using Payments Data to Nowcast Macroeconomic Variables During the Onset of COVID-19," Staff Working Papers 21-2, Bank of Canada.
    3. Andrew Lee-Poy, 2018. "Characterizing the Canadian Financial Cycle with Frequency Filtering Approaches," Staff Analytical Notes 2018-34, Bank of Canada.
    4. James T. E. Chapman & Ajit Desai, 2023. "Macroeconomic Predictions Using Payments Data and Machine Learning," Forecasting, MDPI, vol. 5(4), pages 1-32, November.
    5. Lin Zhu & Jian He, 2024. "China financial stability and asymmetric implications for economic stability," Economic Change and Restructuring, Springer, vol. 57(1), pages 1-29, February.
    6. Bulusu, Narayan & Guérin, Pierre, 2019. "What drives interbank loans? Evidence from Canada," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 427-444.
    7. Thibaut Duprey & Tom Roberts, 2017. "A Barometer of Canadian Financial System Vulnerabilities," Staff Analytical Notes 17-24, Bank of Canada.
    8. Vladyslav Filatov, 2020. "A New Financial Stress Index for Ukraine," IHEID Working Papers 15-2020, Economics Section, The Graduate Institute of International Studies.
    9. Kabaca, Serdar & Tuzcuoglu, Kerem, 2024. "International transmission of quantitative easing policies: Evidence from Canada," Journal of Economic Dynamics and Control, Elsevier, vol. 162(C).
    10. Vladyslav Filatov, 2021. "A New Financial Stress Index for Ukraine," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, issue 251, pages 37-54.
    11. Sha Zhu & Fujun Lai & Jie Deng & Qian Wang, 2021. "Do Mutual Funds’ Exposure to Financial Stress Predict Their Future Returns? Evidence From China," SAGE Open, , vol. 11(4), pages 21582440211, October.
    12. Somnath Chatterjee & Ching‐Wai (Jeremy) Chiu & Thibaut Duprey & Sinem Hacıoğlu‐Hoke, 2022. "Systemic Financial Stress and Macroeconomic Amplifications in the United Kingdom," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 380-400, April.

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    More about this item

    Keywords

    Central bank research; Financial markets; Financial stability; Monetary and financial indicators;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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