Journal Article

Financial stress and economic activity in Germany

Author

  • Björn van Roye
Publication Date

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.

Info

JEL Classification
E32, E37, E44, E5

Key Words

  • Dynamic factor model
  • Financial crises
  • Financial stress index
  • Threshold vector autoregressive model