he financial crisis and the European sovereign debt crisis have shown that financial stress may be an important driver for economic activity. In this paper, I derive a financial stress index for Germany, using a dynamic approximate factor model that summarizes a stress component of various financial variables. Subsequently, I analyze the effects of financial stress on economic activity in a threshold vector autoregressive model. I find that if the index exceeds a certain threshold, an increase in financial stress causes economic activity to decelerate significantly, whereas if it is below this threshold, economic activity remains nearly unaffected.
- Dynamic factor model
- Financial crises
- Financial stress index
- Threshold vector autoregressive model