Beyond Financial Conditions: Measuring Structural Vulnerabilities in the U.S. Financial System

Michele Modugno, Benjamin Roscoe and Sarah Zoi
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Sarah Zoi: https://www.federalreserve.gov/econres/sarah-zoi.htm

No 2026-065, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We introduce the Financial Vulnerability Index (FVI), a novel indicator of financial vulnerabilities in the U.S. Unlike financial condition indices, which measure current credit market conditions and spike during periods of financial turmoil, the FVI displays the gradual build-up of structural financial weaknesses and declines as such episodes materialize. We demonstrate that the FVI exhibits properties consistent with theoretical mechanisms of financial vulnerabilities. When the index is high, adverse shocks are substantially amplified, generating larger declines in consumption and investment. We provide new empirical evidence that monetary tightening is associated with gradual declines in the FVI, with this effect substantially delayed, taking a few years to fully materialize. Moreover, monetary policy transmission to prices depends on the state of financial vulnerabilities, with significantly stronger effects when vulnerabilities are low.

JEL-codes: C53 E27 E44 G01 (search for similar items in EconPapers)
Pages: 39 p.
Date: 2026-09-21
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:103791

DOI: 10.17016/FEDS.2026.065

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