Monitoring Financial Stability Risks Using Uncertainty Indicators

Michael Wosser and Emil Bandoni
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Michael Wosser: Central Bank of Ireland
Emil Bandoni: Central Bank of Ireland

No 8/SI/26, Central Bank Staff Insights from Central Bank of Ireland

Abstract: No single geopolitical or policy uncertainty indicator captures all financial stability risks, with economic context and forecast horizon of key concern. Looking one quarter ahead, a geopolitical risk indicator can act as a useful near-term discriminant of systemic banking crises, assuming not missing crises is your policy preference. Assuming policy preference indifference, a more standard indicator of financial market stress remains preferred. Looking four quarters ahead, sharp spikes in other global economic policy and trade policy uncertainty indicators signal elevated downside risk to output growth, rendering them potentially valuable additions to financial stability toolkits. Global policy uncertainty lowers Irish equity prices and consumer confidence within one quarter, with corporate credit weakening thereafter, while house prices and financial stress remain broadly stable in our estimates.

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