Prague Economic Papers 2017, 26(3):257-268 | DOI: 10.18267/j.pep.608

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

Ján Malega1, Roman Horváth2
1 Institute of Economic Studies, Charles University, Prague, Czech Republic (malega.jan@gmail.com)
2 Institute of Economic Studies, Charles University, Prague, Czech Republic and UTIA, Czech Academy of Sciences, Prague, Czech Republic (roman.horvath@gmail.com)

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.

Keywords: financial stress indicator, vector autoregression, Czech Republic
JEL classification: E44, E47, G17

Published: June 1, 2017  Show citation

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Malega, J., & Horváth, R. (2017). Financial Stress in the Czech Republic: Measurement and Effects on the Real Economy. Prague Economic Papers, 26(3), 257-268. doi: 10.18267/j.pep.608
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