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Author:Aikman, David 

Working Paper
Financial Vulnerabilities, Macroeconomic Dynamics, and Monetary Policy
We define a measure to be a financial vulnerability if, in a VAR framework that allows for nonlinearities, an impulse to the measure leads to an economic contraction. We evaluate alternative macrofinancial imbalances as vulnerabilities: nonfinancial sector credit, risk appetite of financial market participants, and the leverage and short-term funding of financial firms. We find that nonfinancial credit is a vulnerability: impulses to the credit-to-GDP gap when it is high leads to a recession. Risk appetite leads to an economic expansion in the near-term, but also higher credit and a recession in later years, suggesting an intertemporal tradeoff. Monetary policy is generally ineffective at slowing the economy once the credit-to-GDP gap is high, suggesting important benefits from avoiding excessive credit growth. Financial sector leverage and short-term funding do not lead directly to contractions and thus are not vulnerabilities by our definition.
AUTHORS: Aikman, David; Lehnert, Andreas; Liang, J. Nellie; Modugno, Michele
DATE: 2016-07-07

Working Paper
Mapping Heat in the U.S. Financial System
We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer.
AUTHORS: Aikman, David; Kiley, Michael T.; Lee, Seung Jung; Palumbo, Michael G.; Warusawitharana, Missaka
DATE: 2015-06-24

Journal Article
Mapping Heat in the U.S. Financial System : A Summary
This Note reports a selection of results from research intended to quantitatively measure the buildup and reduction of vulnerabilities in the U.S. financial system over time.
AUTHORS: Aikman, David; Kiley, Michael T.; Lee, Seung Jung; Palumbo, Michael G.; Warusawitharana, Missaka
DATE: 2015-08-05


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