Uncertainty shocks and systemic-risk indicators. (April 2022)

• Record Type: Journal Article
• Authors: Hristov, Nikolay; Roth, Markus
• Is Part Of: Journal of international money and finance. Volume 122(2022)
• Publication Date: 2022-04
• Subjects: D89 -- C32 -- E44 -- G01; Uncertainty -- Crisis indicators -- Structural macroeconomic shocks -- Sign restrictions; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2021.102573
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: Question: Effects of uncertainty shocks on indicators of financial systemic-risk. Method: Structural panel VARs. Panel covers the four largest euro area countries. Finding 1: Systemic risk rises significantly in response to uncertainty shocks. Finding 2: Uncertainty shocks may signal the build-up of financial vulnerabilities. Abstract: The current paper broadens the understanding of the role played by uncertainty in the context of macroeconomic fluctuations. It focuses on the implications of uncertainty shocks for indicators of systemic risk in the financial system. Such indicators' signals tend to precede financial crises and are interpreted as signaling the build-up of considerable misallocations of capital and credit. In an empirical analysis we show for a panel of four euro area countries that negative uncertainty shocks, while boosting economic activity, are followed by unfavorable reactions of systemic-risk indicators. We conclude that standard uncertainty measures contain some useful information on the potential build-up of vulnerabilities in the financial system.