Cover IMF Working Papers
Buy Book in Print
Financial Stress and Economic Activity: Evidence from a New Worldwide Index
Author:
Hites Ahir
Search for other papers by Hites Ahir in
Current site
Google Scholar Close
,
Mr. Giovanni Dell'Ariccia
Search for other papers by Mr. Giovanni Dell'Ariccia in
Current site
Google Scholar Close
,
Davide Furceri https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Davide Furceri in
Current site
Google Scholar Close
,
Mr. Chris Papageorgiou
Search for other papers by Mr. Chris Papageorgiou in
Current site
Google Scholar Close
, and
Hanbo Qi
Search for other papers by Hanbo Qi in
Current site
Google Scholar Close
Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 217
Language:
English
Publication Date:
20 Oct 2023
DOI:
https://doi.org/10.5089/9798400257636.001
ISBN:
9798400257636
ISSN:
1018-5941
Pages:
132
Keywords:
Financial stress; text analysis; country reports; continuous indicator; country and firm economic activity.; firm economic activity; effect of FSI; financial crises episode; Financial soundness indicators; Banking crises; Reserve requirements; Global financial crisis of 2008-2009; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (3.7 MB) Download Epub
This paper uses text analysis to construct a continuous financial stress index (FSI) for 110 countries over each quarter during the period 1967-2018. It relies on a computer algorithm along with human expert oversight and is thus easy to update. The new indicator has a larger country and time coverage and higher frequency than similar measures focusing on advanced economies. And it complements existing binary chronologies in that it can assess the severity of financial crises. We use the indicator to assess the impact of financial stress on the economy using both country- and firm-level data. Our main findings are fivefold: i) consistent with existing literature, we show an economically significant and persistent relationship between financial stress and output; ii) the effect is larger in emerging markets and developing economies and (iii) for higher levels of financial stress; iv) we deal with simultaneous causality by constructing 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) we confirm the presence of an exogenous effect of financial stress through a difference-in-differences exercise and show that effects are larger for firms that are more financially constrained and less profitable.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund