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

In the scope of this thesis, we estimate a financial stress index particularly for the Czech Republic with application for Slovakia, and examine its development during the period 2002-2014. The advantage of the index is primarily its ability to measure the current level of stress in the financial system incorporating information from various sectors of the economy and expressing it in a single-value statistic. We find a marked increase in financial stress at the beginning of the global financial crisis and European sovereign debt crisis with a decrease to nearly pre-crisis levels by the end of our study period. Next, we estimate vector autoregression models and find out that financial stress has systematic effects on unemployment, prices and interest rates, with the maximum response occurring approximately one to two years after the shock in the Czech Republic, and with a half-year delay in Slovakia. 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. JEL Classification G17, G32 Keywords financial stress index, vector autoregression, impulse response