Financial Stress and Economic Activity: Evidence from a New Worldwide Index
IMF Working Papers, October 20, 2023
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- Financial Stress and Economic Activity: Evidence from a New Worldwide Index
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Bibliographic details
- Authors: Hites Ahir, Giovanni Dell'Ariccia, Davide Furceri, Chris Papageorgiou, Hanbo Qi
- Published: October 20, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400257636.001
Methodology and Data
- Constructed a continuous financial stress index (FSI) for 110 countries over each quarter during the period 1967-2018.
- Method combines a computer algorithm with human expert oversight, designed to be easy to update.
- Text analysis-based indicator provides larger country and time coverage and higher frequency than similar measures focusing on advanced economies.
- Indicator complements existing binary chronologies by assessing the severity of financial crises.
- Analysis uses both country- and firm-level data to assess the impact of financial stress on economic activity.
Main findings
- The paper reports fivefold main findings:
- i) Consistent with existing literature, there is an economically significant and persistent relationship between financial stress and output.
- ii) The effect is larger in emerging markets and developing economies.
- iii) The effect is larger for higher levels of financial stress.
- iv) To address simultaneous causality, the authors construct a novel instrument—financial stress originating from other countries—using information from the text analysis, and show that, while there is clear evidence that financial stress harms economic activities, OLS estimates tend to overestimate the magnitude of this effect.
- (iv) A difference-in-differences exercise confirms the presence of an exogenous effect of financial stress and shows that effects are larger for firms that are more financially constrained and less profitable.
Analysis and Interpretation
- The continuous FSI enables assessment of severity, frequency, and cross-country comparisons of financial stress beyond binary crisis dating.
- Instrumental-variable approach leverages cross-country-originating financial stress signals from text analysis to mitigate simultaneous causality concerns.
- Difference-in-differences analysis at the firm level highlights heterogeneity: firms that are more financially constrained and less profitable experience larger adverse effects from financial stress.
Subject Areas and Keywords
- Subject areas: Banking crises, Financial crises, Financial sector policy and analysis, Financial soundness indicators, Global financial crisis of 2008-2009, Monetary policy, Reserve requirements.
- Keywords: Banking crises, continuous indicator, country and firm economic activity., country reports, effect of FSI, financial crises episode, Financial soundness indicators, Financial stress, firm economic activity, Global, Global financial crisis of 2008-2009, Reserve requirements, text analysis.
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- Working Paper