Kiel Working Papers, Kiel Institute for World Economics
No 1743:
Financial stress and economic activity in Germany and the Euro Area
Björn van Roye
Abstract: The financial crisis 2008-2009 and the European sovereign
debt crisis have shown that stress on financial markets is important for
analyzing and forecasting economic activity. Since financial stress is not
directly observable but is presumably reflected in many financial market
variables, it is useful to derive an indicator summarizing the stress
component of these variables. Therefore, I derive a financial market stress
indicator (FMSI) for Germany and the Euro Area using a dynamic approximate
factor model. Subsequently, applying these indicators, I analyse the
effects of financial stress on economic activity in a small Bayesian VAR
model. An increase in financial stress leads to a significant dampening of
GDP growth and the inflation rate. Additionally, there is a substantial and
persistent decline in short-term nominal interest rates. I find that about
fifteen percent of variation in real GDP growth can be accounted for
variations in financial stress for Germany and about 30 percent in the Euro
Area. I show that the inclusion of the indicator significantly improves
out-of-sample forecasting accuracy for real GDP growth in Germany compared
to a model without the indicator and other forecast benchmarks
Keywords: Forecasting, Financial stress indicator, Financial Systems, Recessions, Slowdowns, Financial Crises; (follow links to similar papers)
JEL-Codes: E5,; E6,; F3,; G2,; G14; (follow links to similar papers)
37 pages, November 2011
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Downloadable files:
financial-stress-and-econ ... germany-and-the-euro-area
Download Statistics
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design Joakim Ekebom