The Real-Time Information Content of Financial Stress and Bank Lending on European Business Cycles

Jakob Fiedler, Josef Ruzicka and Thomas Theobald

No 198-2019, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: We integrate newly created financial stress indices (FSIs) into an automated real-time recession forecasting procedure for the Euro area and Germany. The FSIs are based on a large number of financial indicators, each of them potentially signaling financial stress. A subset of these indicators is selected in real-time and their stress signal is summarized by principal component analysis (PCA). Besides conventional measures of realized financial stress, such as volatilities, we include variables related to the financial cycle, such as different types of credit growth, for which strong increases may anticipate future financial market stress. Building blocks in our fully automated real-time probit forecasts are then i. the use of a broad set of widely acknowledged macroeconomic and financial variables with predictive power for a real economic downturn, ii. the use of both general-to-specific and specific-to-general approaches for variable and lag selection, and iii. the averaging of different specifications into a composite forecast. As a real-time out-of-sample analysis shows, the inclusion of financial stress leads to an improved recession forecast for the Euro area, while the results for Germany are mixed. Finally, we also evaluate the predictive power of the change in bank lending (credit impulse) and find that it adds little additional information.

Pages: 40 pages
Date: 2019
New Economics Papers: this item is included in nep-ban, nep-eec, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.boeckler.de/pdf/p_imk_wp_198_2019.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:198-2019

Access Statistics for this paper

More papers in IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute Contact information at EDIRC.
Bibliographic data for series maintained by Sabine Nemitz ().