Monitoring Macro-Financial Vulnerability : A Primer
Linkages between the real and financial sectors in an economy can lead to a buildup of balance sheet mismatches of key entities—corporates, financial institutions, households, and the public sector. Once such imbalances have built up, they can make...
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Online Access: | http://documents.worldbank.org/curated/en/2016/07/26577963/monitoring-macro-financial-vulnerability-primer http://hdl.handle.net/10986/24937 |
| Summary: | Linkages between the real and financial
sectors in an economy can lead to a buildup of balance sheet
mismatches of key entities—corporates, financial
institutions, households, and the public sector. Once such
imbalances have built up, they can make the economy
vulnerable to macroeconomic shocks, whether external or
domestic in origin. This paper discusses the key mismatches
that can make entities vulnerable to shocks and how such
vulnerability can build up during the business cycle.
Against this backdrop, the paper then discusses a framework
and potential indicators that may be useful to monitor such
developments. These indicators are being developed as part
of the MFM macro-financial monitoring effort. The paper is
organized as follows. Section two provides a brief
discussion of the risks associated with these different
balance sheet mismatches. Section three discusses how
positive shocks in the real sector—such as an upturn in
domestic business cycles (which in turn are often instigated
or accompanied by external developments such as capital
inflows)—can interact with the financial sector and lead to
a build-up of balance sheet mismatches. Section four then
describes how, once such vulnerability has been built up, a
negative shock can lead to a downward spiral of credit
contraction and economic downturns. Finally, section five
discusses a possible set of indicators for measuring the
buildup of vulnerability. |
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