IDEAS home Printed from https://ideas.repec.org/a/bla/obuest/v84y2022i2p380-400.html
   My bibliography  Save this article

Systemic Financial Stress and Macroeconomic Amplifications in the United Kingdom

Author

Listed:
  • Somnath Chatterjee
  • Ching‐Wai (Jeremy) Chiu
  • Thibaut Duprey
  • Sinem Hacıoğlu‐Hoke

Abstract

We develop a daily composite index of financial stress for the United Kingdom over 50 years, the UKFSI. The index includes market stress indicators based on their incremental information to capture financial crises. During the COVID‐19 crisis, financial stress peaks but remains less severe than during the Global Financial Crisis. The UKFSI is used in a threshold vector autoregression to differentiate the economic dynamics between tranquil and stressful periods. We highlight the importance of nonlinearities that amplify shocks. But we find no evidence of financial shocks contributing to the COVID‐19 crisis, possibly reflecting effective policy interventions.

Suggested Citation

  • Somnath Chatterjee & Ching‐Wai (Jeremy) Chiu & Thibaut Duprey & Sinem Hacıoğlu‐Hoke, 2022. "Systemic Financial Stress and Macroeconomic Amplifications in the United Kingdom," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 380-400, April.
    • Handle: RePEc:bla:obuest:v:84:y:2022:i:2:p:380-400
    DOI: 10.1111/obes.12466
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/obes.12466
    Download Restriction: no
    File URL: https://libkey.io/10.1111/obes.12466?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Caldara, Dario & Fuentes-Albero, Cristina & Gilchrist, Simon & Zakrajšek, Egon, 2016. "The macroeconomic impact of financial and uncertainty shocks," European Economic Review, Elsevier, vol. 88(C), pages 185-207.
    2. Drehmann, Mathias & Juselius, Mikael, 2014. "Evaluating early warning indicators of banking crises: Satisfying policy requirements," International Journal of Forecasting, Elsevier, vol. 30(3), pages 759-780.
    3. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    4. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
    5. Christoph Görtz & John D. Tsoukalas & Francesco Zanetti, 2022. "News Shocks under Financial Frictions," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 210-243, October.
    6. Hubrich, Kirstin & Tetlow, Robert J., 2015. "Financial stress and economic dynamics: The transmission of crises," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 100-115.
    7. Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
    8. Jon Danielsson & Marcela Valenzuela & Ilknur Zer, 2018. "Learning from History: Volatility and Financial Crises," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2774-2805.
    9. repec:ulb:ulbeco:2013/13388 is not listed on IDEAS
    10. Lo Duca, Marco & Koban, Anne & Basten, Marisa & Bengtsson, Elias & Klaus, Benjamin & Kusmierczyk, Piotr & Lang, Jan Hannes & Detken, Carsten & Peltonen, Tuomas, 2017. "A new database for financial crises in European countries," Occasional Paper Series 194, European Central Bank.
    11. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    12. Vasco Cúrdia & Michael Woodford, 2010. "Credit Spreads and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 3-35, September.
    13. Mikhail V. Oet & John M. Dooley & Stephen J. Ong, 2015. "The Financial Stress Index: Identification of Systemic Risk Conditions," Risks, MDPI, vol. 3(3), pages 1-25, September.
    14. Koop, Gary & Korobilis, Dimitris, 2014. "A new index of financial conditions," European Economic Review, Elsevier, vol. 71(C), pages 101-116.
    15. Thibaut Duprey & Benjamin Klaus, 2017. "How to Predict Financial Stress? An Assessment of Markov Switching Models," Staff Working Papers 17-32, Bank of Canada.
    16. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    17. Haroon Mumtaz & Francesco Zanetti, 2013. "The Impact of the Volatility of Monetary Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 535-558, June.
    18. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    19. Lenza, Michele & Primiceri, Giorgio E., 2020. "How to estimate a VAR after March 2020," Working Paper Series 2461, European Central Bank.
    20. Duprey, Thibaut & Klaus, Benjamin & Peltonen, Tuomas, 2017. "Dating systemic financial stress episodes in the EU countries," Journal of Financial Stability, Elsevier, vol. 32(C), pages 30-56.
    21. Markus K. Brunnermeier & Yuliy Sannikov, 2014. "A Macroeconomic Model with a Financial Sector," American Economic Review, American Economic Association, vol. 104(2), pages 379-421, February.
    22. Piergiorgio Alessandri & Haroon Mumtaz, 2017. "Financial conditions and density forecasts for US output and inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 66-78, March.
    23. Walentin, Karl, 2014. "Business cycle implications of mortgage spreads," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 62-77.
    24. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    25. Jonas E. Arias & Juan F. Rubio‐Ramírez & Daniel F. Waggoner, 2018. "Inference Based on Structural Vector Autoregressions Identified With Sign and Zero Restrictions: Theory and Applications," Econometrica, Econometric Society, vol. 86(2), pages 685-720, March.
    26. Thibaut Duprey, 2020. "Canadian Financial Stress and Macroeconomic Condition," Canadian Public Policy, University of Toronto Press, vol. 46(S3), pages 236-260, October.
    27. Emanuele Bacchiocchi, 2017. "On the Identification of Interdependence and Contagion of Financial Crises," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 1148-1175, December.
    28. Haroon Mumtaz & Paolo Surico, 2018. "Policy uncertainty and aggregate fluctuations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(3), pages 319-331, April.
    29. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-1061, April.
    30. Kapetanios, George & Price, Simon & Young, Garry, 2018. "A UK financial conditions index using targeted data reduction: Forecasting and structural identification," Econometrics and Statistics, Elsevier, vol. 7(C), pages 1-17.
    31. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    32. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    33. Francesco Furlanetto & Francesco Ravazzolo & Samad Sarferaz, 2019. "Identification of Financial Factors in Economic Fluctuations," The Economic Journal, Royal Economic Society, vol. 129(617), pages 311-337.
    34. Kremer, Manfred & Lo Duca, Marco & Holló, Dániel, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series 1426, European Central Bank.
    35. Scott Brave & R. Andrew Butters, 2011. "Monitoring financial stability: a financial conditions index approach," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 35(Q I), pages 22-43.
    36. repec:ecb:ecbwps:20111426 is not listed on IDEAS
    37. Philip Liu & Konstantinos Theodoridis & Haroon Mumtaz & Francesco Zanetti, 2019. "Changing Macroeconomic Dynamics at the Zero Lower Bound," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(3), pages 391-404, July.
    38. Jing, Zhongbo & de Haan, Jakob & Jacobs, Jan & Yang, Haizhen, 2015. "Identifying banking crises using money market pressure: New evidence for a large set of countries," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 1-20.
    39. Fabio Fornari & Livio Stracca, 2012. "What does a financial shock do? First international evidence [Financial intermediaries, financial stability and monetary policy]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 27(71), pages 407-445.
    40. Craig S. Hakkio & William R. Keeton, 2009. "Financial stress: what is it, how can it be measured, and why does it matter?," Economic Review, Federal Reserve Bank of Kansas City, vol. 94(Q II), pages 5-50.
    41. Simon Gilchrist & Egon Zakrajšek, 2011. "Monetary Policy and Credit Supply Shocks," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(2), pages 195-232, June.
    42. Cardarelli, Roberto & Elekdag, Selim & Lall, Subir, 2011. "Financial stress and economic contractions," Journal of Financial Stability, Elsevier, vol. 7(2), pages 78-97, June.
    43. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    44. Piergiorgio Alessandri & Haroon Mumtaz, 2017. "Financial conditions and density forecasts for US output and inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 66-78, March.
    45. repec:mcb:jmoncb:v:45:y:2013:i::p:535-558 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tuzcuoglu, Kerem, 2024. "Nonlinear transmission of international financial stress," Economic Modelling, Elsevier, vol. 139(C).
    2. Katalin Varga & Tibor Szendrei, 2024. "Non-stationary Financial Risk Factors and Macroeconomic Vulnerability for the UK," Papers 2404.01451, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tuzcuoglu, Kerem, 2024. "Nonlinear transmission of international financial stress," Economic Modelling, Elsevier, vol. 139(C).
    2. Alessandri, Piergiorgio & Mumtaz, Haroon, 2019. "Financial regimes and uncertainty shocks," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 31-46.
    3. Duprey, Thibaut & Klaus, Benjamin & Peltonen, Tuomas, 2017. "Dating systemic financial stress episodes in the EU countries," Journal of Financial Stability, Elsevier, vol. 32(C), pages 30-56.
    4. Kappler, Marcus & Schleer, Frauke, 2017. "A financially stressed euro area," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 11, pages 1-37.
    5. Arrigoni, Simone & Bobasu, Alina & Venditti, Fabrizio, 2020. "The simpler the better: measuring financial conditions for monetary policy and financial stability," Working Paper Series 2451, European Central Bank.
    6. Simone Arrigoni & Alina Bobasu & Fabrizio Venditti, 2022. "Measuring Financial Conditions using Equal Weights Combination," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(4), pages 668-697, December.
    7. Francesco Corsello & Valerio Nispi Landi, 2020. "Labor Market and Financial Shocks: A Time‐Varying Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 777-801, June.
    8. Mario Forni & Luca Gambetti & Nicolò Maffei-Faccioli & Luca Sala, 2023. "The impact of financial shocks on the forecast distribution of output and inflation," Working Paper 2023/3, Norges Bank.
    9. Duprey, Thibaut & Klaus, Benjamin, 2022. "Early warning or too late? A (pseudo-)real-time identification of leading indicators of financial stress," Journal of Banking & Finance, Elsevier, vol. 138(C).
    10. Magnus Reif, 2020. "Macroeconomics, Nonlinearities, and the Business Cycle," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 87.
    11. Mario Forni & Luca Gambetti & Nicolò Maffei‐Faccioli & Luca Sala, 2024. "Nonlinear Transmission of Financial Shocks: Some New Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(1), pages 5-33, February.
    12. Manfred Kremer, 2016. "Macroeconomic effects of financial stress and the role of monetary policy: a VAR analysis for the euro area," International Economics and Economic Policy, Springer, vol. 13(1), pages 105-138, January.
    13. Wang, Bo & Li, Haoran, 2021. "Downside risk, financial conditions and systemic risk in China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    14. Piergiorgio Alessandri & Antonio M. Conti & Fabrizio Venditti, 2016. "The Financial Stability Dark Side of Monetary Policy," BCAM Working Papers 1601, Birkbeck Centre for Applied Macroeconomics.
    15. Giovanni Pellegrino & Federico Ravenna & Gabriel Züllig, 2021. "The Impact of Pessimistic Expectations on the Effects of COVID‐19‐Induced Uncertainty in the Euro Area," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(4), pages 841-869, August.
    16. Layal MansourIshrakieh & Leila Dagher & Sadika El Hariri, 2020. "A financial stress index for a highly dollarized developing country : The case of Lebanon," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 20(2), pages 43-52.
    17. Silgado-Gómez, Edgar, 2022. "Sovereign Uncertainty," Research Technical Papers 10/RT/22, Central Bank of Ireland.
    18. Giovanni Caggiano & Efrem Castelnuovo & Gabriela Nodari, 2014. "Uncertainty and Monetary Policy in Good and Bad Times," "Marco Fanno" Working Papers 0188, Dipartimento di Scienze Economiche "Marco Fanno".
    19. Chavleishvili, Sulkhan & Kremer, Manfred, 2023. "Measuring systemic financial stress and its risks for growth," Working Paper Series 2842, European Central Bank.
    20. Mehmet Balcilar & Rangan Gupta & Theshne Kisten, 2021. "The impact of uncertainty shocks in South Africa: The role of financial regimes," Review of Financial Economics, John Wiley & Sons, vol. 39(4), pages 442-454, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:obuest:v:84:y:2022:i:2:p:380-400. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.