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The Real Effects of Financial Sector Risk

Andrea M. Maechler and Alexander Tieman

No 09/198, IMF Working Papers from International Monetary Fund

Abstract: This paper estimates the magnitude of key effects on the real economy from financial sector stress. We focus on the short-run feedback effect from market-based indicators of financial sector risk to the real economy through the credit channel, and estimate this effect on an economy-wide (macro) level, as well as on the level of individual large banks. Both estimates yield significant feedback effects of substantial magnitude. The estimates are consistent with other work in this area. Our results suggest that prudential supervision could be enhanced by taking into account the feedback effects of financial instability in the real economy. We also propose a way to integrate feedback effects into stress tests in order to improve realism and accuracy or macroeconomic stress scenarios, as well as a metric to interpret stress testing results.

Keywords: Financial stability; Financial risk; European Union; Economic models; Credit expansion; Banks; financial sector risk, feedback effects, second-round effects, credit growth, financial sector, regression results, panel regression, regression equation, Multiple or Simultaneous Equation Models: Models with Panel Data, Financial Markets and the Macroeconomy, General Financial Markets, (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec and nep-rmg
Date: 2009-09-01
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