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Assessing vulnerabilities to financial shocks in some key global economies
This paper describes a quantitative, data-driven method to assess vulnerabilities in a range of countries. We provide country-level vulnerability indices that can be used to gauge the level of fragility at any point in time. In particular, our results suggest that in the run-up to the global financial crisis, vulnerabilities rose to extremely high levels in the USA, but were only a little above average in Europe and had actually receded across much of Asia. The picture has changed dramatically during the recovery, however, with vulnerabilities close to record-highs by the end of 2015 in some of the Asian economies. We document numerous practical challenges that arise when developing such a toolkit, the main one being to know the trend — the ‘neutral’ level — of a financial variable (eg credit-to-GDP). In that context, one important contribution of this paper is to document the robustness of vulnerability measures to different judgements about the trend level of financial variables. We find that for most countries results are fairly robust to different views of the underlying trend, but importantly that this robustness is not universal. In particular, at the moment differing views of what ‘the new normal’ is suggest dramatically different assessments of the level of fragility in the USA and South Korea.
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Jack Fisher is a research assistant at the London School of Economics (LSE). Jack joined the LSE’s Public Economics Programme, based at the Suntory and Toyota International Centres of Economics and Related Disciplines, in October 2016. Prior to that, Jack was a postgraduate intern at the Bank of England with stints in the International Directorate and the EU Withdrawal Unit. Jack holds an MPhil in Economics from the University of Oxford.
Lukasz Rachel is a senior economist at the Bank of England and a PhD candidate at the LSE. Lukasz returned to the LSE to commence his PhD in September 2015, seven years after first joining the Bank. During his time at the Bank, Lukasz analysed UK productivity and inflation, and more recently performed several roles in the International Directorate (starting as the US expert, switching to emerging markets, and finally researching global economy issues). During his PhD, Lukasz aims to further his technical know-how and combine it with his practical experience to develop rigorous research in the fields of macroeconomics, economic growth and international economics.
CitationFisher, Jack and Rachel, Lukasz (2017, February 1). Assessing vulnerabilities to financial shocks in some key global economies. In the Journal of Risk Management in Financial Institutions, Volume 10, Issue 1.