In this paper, we construct a single composite financial stress indicator (FSI) which aims to predict developments in the real economy in the euro area. Our FSI contains financial variables that have a causal relationship with the real economy. Therefore, our FSI is able to serve as an early warning indicator for negative impacts of financial stress on the real economy.The causal relationship between our FSI and the real economy is tested and confirmed by the error-correction models. An empirical analysis reveals that our FSI has more predictive power than the bench-mark normally used for financial markets, especially stock markets, namely the Euro STOXX 50 volatility index for the recent banking crisis and the euro-area sovereign debt crisis. One of the main empirical results is that our FSI shows negative effects from financial markets on the real economy one to four months in advance. Nicht-technische Zusammenfassung AbstractIn this paper, we construct a single composite financial stress indicator (FSI) which aims to predict developments in the real economy in the euro area. Our FSI was shown to perform better than the Euro STOXX 50 volatility index for the recent banking crisis and the euro-area sovereign debt crisis and to be able to serve as an early warning indicator for negative impacts of financial stress on the real economy.

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