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Financial Stress and Economic Activity: Evidence from a New Worldwide Index

Hites Ahir, Giovanni Dell'ariccia, Davide Furceri, Chris Papageorgiou () and Hanbo Qi

No 2023/217, IMF Working Papers from International Monetary Fund

Abstract: This paper uses text analysis to construct a continuous financial stress index (FSI) for 110 countries over each quarter during the period 1967-2018. It relies on a computer algorithm along with human expert oversight and is thus easy to update. The new indicator has a larger country and time coverage and higher frequency than similar measures focusing on advanced economies. And it complements existing binary chronologies in that it can assess the severity of financial crises. We use the indicator to assess the impact of financial stress on the economy using both country- and firm-level data. Our main findings are fivefold: i) consistent with existing literature, we show an economically significant and persistent relationship between financial stress and output; ii) the effect is larger in emerging markets and developing economies and (iii) for higher levels of financial stress; iv) we deal with simultaneous causality by constructing a novel instrument—financial stress originating from other countries—using information from the text analysis, and show that, while there is clear evidence that financial stress harms economic activities, OLS estimates tend to overestimate the magnitude of this effect; (iv) we confirm the presence of an exogenous effect of financial stress through a difference-in-differences exercise and show that effects are larger for firms that are more financially constrained and less profitable.

Keywords: Financial stress; text analysis; country reports; continuous indicator; country and firm economic activity.; firm economic activity; effect of FSI; financial crises episode; Financial soundness indicators; Banking crises; Reserve requirements; Global financial crisis of 2008-2009; Global (search for similar items in EconPapers)
Pages: 132
Date: 2023-10-20
New Economics Papers: this item is included in nep-big, nep-fdg and nep-ifn
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Citations: View citations in EconPapers (7)

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