Distress in the Financial Sector and Economic Activity

Carlson, Mark A.; King, Thomas B.; Lewis, Kurt F.

doi:10.2202/1935-1682.2697

Cited by 46 publications

(49 citation statements)

References 26 publications

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“…Although the relationship between a country's rate of economic growth and its financial development has been studied in depth, few studies have sought to explain how this link operates during periods of financial instability [80,81]. More recently, using different measures, financial instability was found to have a negative effect on economic growth in the 27 EU member states during the period 1998-2011 [82].…”

Section: Baseline Resultsmentioning

confidence: 99%

Financial Development and Economic Growth: The Role of Foreign-Owned Banks in CESEE Countries

et al. 2017

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This study focuses on the role of financial development in the economic growth of Central, Eastern and South-Eastern European (CESEE) countries in the post-communist era (1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014), which coincides with the opening up of financial markets to foreign investors and the global financial crisis. We investigate whether economic growth in CESEE countries has benefited from the presence of foreign-owned banks. To this end, we introduce some refined measures of financial development and control for banks' financial strength. Our results challenge the idea that bank credit fosters economic growth and that foreign-owned banks are indisputably a positive addition to local markets able to foster economic growth.

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Section: Baseline Resultsmentioning

confidence: 99%

Financial Development and Economic Growth: The Role of Foreign-Owned Banks in CESEE Countries

et al. 2017

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“…Hubrich and Tetlow (2011) for the US and Hartmann et al (2012) for the euro area provide qualitatively similar evidence on stronger impacts of financial stress on economic activity in high-stress regimes within richer specifications of Markov-switching VARs, where the latter study uses the CISS to measure financial stress. The present paper therefore also relates to the general literature examining empirically the real impacts of financial stress (e.g., Hakkio and Keeton 2009, Cardarelli, Elekdag and Lall (2011), Hatzius et al 2010, Li and St-Amant 2010, Mallick and Sousa 2011, Carlson, King and Lewis 2011, and van Roye 2011.…”

Section: Introductionmentioning

confidence: 85%

CISS - A Composite Indicator of Systemic Stress in the Financial System

Holló¹,

2012

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The refereeing process of this paper has been coordinated by a team composed of Cornelia Holthausen, Kalin Nikolov and Bernd Schwaab (all ECB). Terms of use: Documents in EconStor mayThe paper is released in order to make the research of MaRs generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the ones of the author(s) and do not necessarily reflect those of the ECB or of the ESCB. AcknowledgementsWe thank Philipp Hartmann for inspiring and supporting this project throughout all stages. Philipp also invented the indicator's name and its abbreviation CISS (pronounced like "kiss"). We thank Tommy Kostka for excellent research assistance and for several good ideas which helped improving the CISS. Very helpful comments from Geert Bekaert, Wolfgang Lemke, Simone Manganelli and an anonymous referee are gratefully acknowledged. We finally thank participants at the Euro Area Business Cycle Network conference "Econometric Modelling of Macro-Financial Linkages" in Florence and the 5th CSDA International Conference on Computational and Financial Econometrics in London for fruitful discussions and comments. However, the views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank, the Eurosystem or the Magyar Nemzeti Bank. CISS indicatorPlease find weekly updates of the CISS data here. cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. Dániel HollóKeywords: Financial system, Financial stability, Systemic risk, Financial stress index, Macro-financial linkages JEL Classifications: G01, G10, G20, E441 Non-technical SummaryThe recent financial and economic crisis revealed considerable gaps in the theoretical and empirical frameworks for analysing, monitoring and controlling systemic risk in the financial system. Academics and financial authorities all around the globe accordingly have been stepping up their efforts to improve the suit of tools...

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“…Several studies indicate that the credit channel is the main channel of transmission of financial distress (Jacobson et al, 2005;Gilchrist et al, 2009;Carlson et al, 2011), This transmission channel may be further influenced by the financial accelerator mechanism (Kiyotaki and Moore, 1997;Bernanke et al, 1999), and Bernanke et al (1999) argue that monetary policy, in particular, impacts the real economy through the financial accelerator mechanism. Alternatively, Goodhart et al (2006) analyze financial fragility by means of a micro-founded general equilibrium model featuring endogenous default and heterogeneous agents that is distinct from, but complementary to, the role of the financial accelerator.…”

Section: The Linkages Of Financial Stressmentioning

confidence: 99%

“…1 Alves (2005) accounts for the likelihood that defaults and macroeconomic variables display common trends. Carlson et al (2011) develop an index of financial sector health using a distance-to-default (DD) measure that is based on a Merton-style option-pricing model and find that the soundness of the financial sector has an impact on macroeconomic variables. Hoggarth et al (2005) consider the dynamics between banks' write-off to loan ratios and key macroeconomic variables in estimating the costs of banking crises and find that economic growth has somewhat of an effect on banks' stress ratios but no effect in the opposite direction.…”

Section: Different Measures Of Financial Stressmentioning

confidence: 99%