Financial Stress in the Czech Republic: Measurement and Effects on the Real Economy
Financial Stress in the Czech Republic: Measurement and Effects on the Real Economy

Summary/Abstract: We estimate a financial stress index for the Czech Republic and examine its development during the 2002–2014 period. We find a marked increase in financial stress at the beginning of the global financial crisis with a decrease to nearly pre-crisis levels by the end of our study period. Next, we estimate vector autoregression models of the Czech economy and find that financial stress has systematic effects on output, prices and interest rates, with the maximum response occurring approximately one and a half years after the shock. Specifically, an increase in financial stress is associated with higher unemployment, lower prices and lower interest rates, indicating its detrimental effects on the real economy.

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