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Financial stress and economic activity in Germany

Björn van Roye

Empirica, 2014, vol. 41, issue 1, 101-126

Abstract: The 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. Copyright Springer Science+Business Media New York 2014

Keywords: Financial stress index; Financial crises; Financial stability; Dynamic factor model; Threshold vector autoregressive model; Germany; E32; E37; E44; E5; E6 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s10663-013-9224-0

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