Diagnosing the Financial System: Financial Conditions and Financial Stress

Scott Brave and R. Andrew Butters
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R. Andrew Butters: Stanford University

International Journal of Central Banking, 2012, vol. 8, issue 2, 191-239

Abstract: We approach the task of monitoring financial stability within a framework that balances the costs and benefits of identifying future crisis-like conditions based on past U.S. financial crises. Our results indicate that the National Financial Conditions Index (NFCI) produced by the Federal Reserve Bank of Chicago is a highly predictive and robust indicator of financial stress at leading horizons of up to one year, with measures of leverage playing a crucial role in signaling financial imbalances. At longer forecast horizons, we propose an alternative sub-index of the NFCI that captures the relationship between non-financial leverage, financial stress, and economic activity.

JEL-codes: C43 G01 G17 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (118)

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