Financial stress index, growth and price stability in India: some recent evidence

Abstract

This paper examine aggregate financial stress index for India is constructed by taking monthly data from different segments of the financial market like money market, bond market, equity market, foreign exchange market, and the banking sector, for the period March 2007 to December 2016. The interrelationship and feedback effect between financial stress, economic growth and price stability are tested by using correlation and an unrestricted VAR model. The impulse response function of the VAR model shows that financial stress leads to decline in growth after a lag period and higher growth rate for a longer period of time increases stress in the financial system. The variance decomposition result shows that the contribution of FSI to the variation of other variables are not much high but other variables can contribute to the variation in FSI to some extent.

The relationship between price and financial stability in new monetary policy designs: the case of the US using the TVP-SVAR model

“…To achieve this purpose, the time-varying nature of the relationship between the price stability, financial stability, policy interest rate and money supply in the US, where monetary policies are designed to achieve price stability, full employment and moderate long-term interest rate targets, is studied econometrically with the TVP-SVAR model for the period 1993:12-2020:12. The results of the estimated TVP-SVAR models are parallel with the empirical findings of studies by Dhal et al (2011), Blot et al (2015), Sethi & Acharya (2020) and Sahoo (2020), who found mutual relationships between price and financial stability and who corroborate the proposition of the new environment hypothesis in the theoretical literature that price stability may not necessarily guarantee financial stability.…”

“…A study on Germany (Euro area) applied Bayesian VAR (Van Roye, 2011). In the context of India, the VEC (Ramesh Babu and Venkateswarlu, 2017) and VAR (Sahoo, 2020). Unsurprisingly, all these studies concluded that financial instabilities in the relevant countries negatively affect and prevent price stability.…”

“…This emerging conjuncture in the global economy approximately ten years after the GFC not only reminds us of the global economic outlook in the pre-GFC period but also shows the difficulties faced by the central banks in designing monetary policies during a period of crisis (Fouejieu et al, 2019). This view of the global economy after the GFC leads to the questioning and redesigning of traditional monetary policies based on inflation targeting, which have been implemented by a significant portion of central banks of both developed and developing countries since the 1990s (Smets, 2014;Sahoo, 2020). Thus, the GFC has reduced the effectiveness of policies that assume that in both developed and developing countries where output and inflation deficits are relatively balanced, the central bank's adjusted interest rates based on output and inflation deficit are compatible in ensuring price and financial stability (Mishkin, 2011;Fouejieu, 2017).…”

Financial Stress Index and Economic Activity in South Africa: New Evidence

“…The result, therefore, indicates that though the immediate impact of financial stress is not pronounced, it does have a negative future impact of output. is similar to the study of Sahoo (2020) in the case of India. In this study, it was revealed that financial stress does harm growth but with a certain time lag.…”

Macroeconomic Perspective on Constructing Financial Vulnerability Indicator in China

“…Sahoo (2020) utilized high frequency data from money market, bond market, equity market, foreign exchange market, and the banking sector in constructing a financial stress index for the Indian economy. Similar to the finding from Monin (2019), Sahoo (2020) found out that financial stress ensues in slowdown in economic growth and added that higher economic growth for a certain period of time gives rise in financial stress. Similarly, Ishrakieh et al (2020) implemented three market segments data from the Lebanese financial system in developing a financial stress index as a monitoring tool to maintain financial and economic stability in Lebanon.…”