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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

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1935-1682
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Volume 11, Issue 1 (Jun 2011)

Distress in the Financial Sector and Economic Activity

Mark A Carlson
  • 1Board of Governors of the Federal Reserve,
/ Thomas King
  • 2Board of Governors of the Federal Reserve,
/ Kurt Lewis
  • 3Board of Governors of the Federal Reserve,
Published Online: 2011-06-15 | DOI: https://doi.org/10.2202/1935-1682.2697

Abstract

We construct daily market-based measures of distance to default for large U.S. financial institutions since 1973. These measures have significant predictive power for institution bankruptcy more than one year in advance. We aggregate the distances to default across institutions to provide an index of the overall health of the financial-services industry. We show that deteriorations in this Financial Institution Health Index are associated with tighter lending standards and higher interest rates on bank loans and precede declines in employment and industrial production. We argue that this points to the condition of financial institutions as an independent source of macroeconomic variability, distinct from traditional accelerator mechanisms.

Keywords: financial distress; economic activity; financial intermediation

About the article

Published Online: 2011-06-15


Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, DOI: https://doi.org/10.2202/1935-1682.2697. Export Citation

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