August 2019

IMF ST A FF D ISC U SSIO N N O T E

SDN/19/06
A Monitoring Framework for
Global Financial Stability

Tobias Adrian, Dong He, Nellie Liang, and Fabio Natalucci

DISCLAIMER: Staff Discussion Notes (SDNs) showcase policy-related analysis and research being
developed by IMF staff members and are published to elicit comments and to encourage debate. The
views expressed in Staff Discussion Notes are those of the author(s) and do not necessarily represent the
views of the IMF, its Executive Board, or IMF management.
A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

©2019 International Monetary Fund

A Monitoring Framework for Global Financial Stability

Prepared by Tobias Adrian, Dong He, Nellie Liang, and Fabio Natalucci

Authorized for distribution by Tobias Adrian

DISCLAIMER: Staff Discussion Notes (SDNs) showcase policy-related analysis and research
being developed by IMF staff members and are published to elicit comments and to encourage
debate. The views expressed in Staff Discussion Notes are those of the author(s) and do not
necessarily represent the views of the IMF, its Executive Board, or IMF management.

JEL Classification Numbers: E44, E52, E58, G21, G28

Financial stability, financial conditions, macroprudential

Keywords: policy
[email protected], [email protected], [email protected],
Authors’ E-mail Address: [email protected],

2 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

CONTENTS

EXECUTIVE SUMMARY __________________________________________________________________________ 4

INTRODUCTION _________________________________________________________________________________ 5

FINANCIAL STABILITY MONITORING FRAMEWORK __________________________________________ 7

A. Financial Vulnerabilities and Externalities ______________________________________________________ 7
B. Financial Vulnerabilities and Amplification of Shocks _________________________________________ 10

MATRIX OF VULNERABILITIES TO MEASURE FINANCIAL STABILITY RISKS _________________ 11

AGGREGATE MEASURE OF FINANCIAL STABILITY RISKS: GROWTH-AT-RISK APPROACH _ 16

A. Estimating Growth at Risk_____________________________________________________________________ 16
B. Estimating the Term Structure of Downside Risks _____________________________________________ 18
C. Quantifying Downside Risks to Global GDP in the Near Term and Medium Term _____________ 21

VULNERABILITIES AND MACROPRUDENTIAL POLICY TOOLS _______________________________ 23

CONCLUSIONS _________________________________________________________________________________ 25

REFERENCES ____________________________________________________________________________________ 27

FIGURES
1. Macrofinancial Linkages: Endogenous Risk Taking, Financial Vulnerabilities, and ______________ 8
2. Transmission and Amplification of Shocks and Risks to the Macroeconomy __________________ 10
3. Macrofinancial Imbalances: Asset Markets ____________________________________________________ 12
4. Macrofinancial Imbalances: Financial Sector Vulnerabilities ___________________________________ 13
5. Balance-sheet Leverage by Sector and Region (From Oct 2018 GFSR) ________________________ 14
6. Financial Vulnerabilities by Sector and Region ________________________________________________ 15
7. One-year-ahead GDP Growth Forecasts Conditional on Financial Conditions _________________ 18
8. Estimated Coefficients on FCI for GaR and Median Growth, AEs and EMEs ____________________ 19
9. Probability Density Function of Projected GDP Growth and GaR for High FCI Group __________ 20
10. Global Financial Conditions Index and GaR Estimates________________________________________ 22
11. Macroprudential Tools for Addressing Financial Vulnerabilities ______________________________ 24

INTERNATIONAL MONETARY FUND 3

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

EXECUTIVE SUMMARY
Since the inception of the Global Financial Stability Report (GFSR), its framework for financial stability
monitoring has continued to evolve and improve. This paper describes the conceptual framework
that underpins the current approach in the GFSR for evaluating global financial stability risks. By
doing so, this paper aims to contribute to financial stability by enhancing transparency about how it
makes its assessments and improving communication. The GFSR is one of the IMF’s flagships
assessing financial stability, and it is released following a discussion by the Executive Board.
The conceptual framework is one in which cyclical financial stability risks arise as macro-financial
imbalances increase because of greater risk-taking by lenders and borrowers. High imbalances can
amplify negative shocks and create an adverse feedback loop as prices fall and financial firms are
forced to deleverage, leading to a sharp decline in economic growth. This framework is based on a
growing body of research from policymaking institutions and academia that explores macro-
financial linkages, many of which were ignored before the financial crisis.
The first part of the approach involves monitoring a set of indicators in a matrix defined by types of
macro-financial imbalances across types of lenders and borrowers in the financial system. It involves
assessing asset valuations, leverage and funding mismatches of financial intermediaries, and credit
of borrowers. This structured and consistent framework for monitoring across countries and time
also facilitates investment in better data and models that will contribute to better risk assessments in
the future.
The second part is a summary aggregate measure of financial stability risk, expressed as downside
risks to forecast GDP growth conditional on financial conditions, or growth at risk. Financial
conditions measure the cost of funding and reflect the underlying price of risk in the economy. The
key innovation of this measure of financial stability risk is that it reflects that the entire distribution
of forecast GDP growth is linked to financial conditions. That is, it is important to consider not only
expected growth but risks to expected growth. In addition, there may be an intertemporal trade-off
for risk, which suggests it is important to consider risks to growth over time. While loose financial
conditions raise growth and reduce risks to growth in the near term, they may increase downside
risks to growth in the medium term because vulnerabilities have built up in response.
The two parts of this approach are complementary, with the more granular analysis of various
specific vulnerabilities providing necessary nuance and depth to the aggregate summary measure of
downside risks to growth. The focus on vulnerabilities highlights potential targets for
macroprudential policies. In addition, because growth at risk is a continuous measure and can be
updated regularly along with forecasts for expected growth, it allows financial stability risks to be
incorporated into decision-making frameworks for prudential or monetary policy, rather than only
intermittently when financial risks are very high. By offering a concrete measure of financial stability
risks in terms of a common metric—GDP growth—it provides a path to better communication and
coordination among financial regulators and central banks, which is important for effective
macroprudential policymaking.

4 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

INTRODUCTION
1. This paper describes the conceptual framework that guides assessments of financial
stability risks for multilateral surveillance, as currently presented in the Global Financial
Stability Report (GFSR). This conceptual framework emphasizes that cyclical risks can arise because
financial firms and investors increase risk-taking in response to loose financial conditions, leading to
a buildup of macro-financial imbalances. Imbalances include compressed risk premiums on asset
prices and higher leverage and greater maturity transformation of financial firms. In addition,
financial firms and investors often have incentives to increase risk-taking collectively because of
increased competition or incomplete compensation contracts, which can increase correlations. This
paper aims to further enhance transparency and improve communication with countries, many of
which have adopted similar approaches for their own financial stability monitoring, by describing in
detail the underpinnings and objectives of the framework for multilateral surveillance in the GFSR.

2. The framework emphasizes consistency in measuring financial vulnerabilities across

countries and over time and offers a summary statistic to quantify aggregate financial
stability risks. The framework supports a systematic empirical approach to multilateral surveillance
with two parts: The first part involves regularly monitoring a broad set of indicators of macro-
financial imbalances that have been identified in a rich body of research as generating negative
externalities, such as those associated with fire sales and contagion. These imbalances can serve as
intermediate targets for macroprudential policies. The second part involves estimating an aggregate
summary measure of financial stability risks, expressed as GDP growth at a low percentile of its
forecast distribution conditional on financial conditions. Both parts are done for countries, regions,
or globally and aim to include analysis of spillovers across countries.

3. The two parts of the empirical approach—a matrix of specific vulnerabilities and a
summary measure of financial stability risks—are distinct but highly complementary for
monitoring and policymaking. More specifically, the first part, to monitor specific vulnerabilities,
can be presented in the GFSR as a heatmap or spider chart and highlights recent changes and the
degree to which vulnerabilities are elevated relative to their historical norms. In addition, analysts
could describe their evaluation of how the vulnerabilities could transmit and amplify some possible
shocks based on various risk scenarios. Importantly, this first part of the empirical approach is
intended to be flexible and reflect the reality that vulnerabilities will emerge in new forms, and
analysts will not always have sufficient information to capture them, especially given the wide range
of countries and regions that are covered. However, the cost of this necessary flexibility is that it
cannot provide a consistent definition or single quantitative assessment of the severity of financial
stability risks. For example, an assessment that nonfinancial corporate debt is high and underwriting
standards are weak, which implies a vulnerable financial system and economy, still does not provide
a summary measure of risks to economic growth or of a banking crisis or whether policymakers
should take policy actions.

INTERNATIONAL MONETARY FUND 5

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

4. The second part is presented as a time series of downside risks to GDP growth, or
growth at risk (GaR), along with summary financial conditions indices and associated
components. That is, GaR estimates for the near term or medium-term (two to three years ahead)
can be compared directly with their historical estimated values to judge the severity of risks.
However, the GaR forecasts on their own cannot capture the nuances of the more detailed
assessment from a matrix designed to identify vulnerabilities, which is needed for determining
possible policy actions. Hence, the two parts are complementary.

5. Each part is expected to improve over time because the desire for consistent
measurement of risks will incentivize improvements in data and models. The matrix offers a
structure to assess vulnerabilities and encourages the development of data over time to improve risk
measurement across countries and regions to contribute to a global assessment. It could lead to
more and better indicators of financial conditions and vulnerabilities that could be used to estimate
GaR for countries or regions, or on a global basis. In addition, global GaR is estimated from a single
global financial conditions summary index, which aggregates conditions in countries and areas, and
work on an index of global financial vulnerabilities is advancing, which can be used in the future to
improve models of GaR. However, GaR is not easily estimated for countries without deep financial
markets or financial data, and so more work is needed to develop alternative measures of downside
risks to output growth for those countries.

6. The two-part empirical monitoring framework facilitates incorporating financial

stability risks into discussions of macroeconomic performance. Risks to financial stability often
are expressed as the probability of a banking crisis, without a rigorous way to translate that risk into
terms used by other macro policymakers. GaR provides a measure of the level of macro-financial
systemic risks in terms of the level of risks to output growth, and thus would allow macrocritical
financial stability risks to be incorporated into broad macroeconomic models. Expressing financial
stability risks arising from the financial sector in the same terms as used in models for other
macroeconomic policies will help when evaluating alternative policy options and foster greater
coordination across policymakers. It can contribute to better macroeconomic management, which
needs to be comprehensive, consistent, and coordinated (see Gaspar, Obstfeld, and Sahay 2016).

7. For monetary policy, the framework is also relevant because the policy rate is a basic
underpinning of the price of risk. Of course, macroprudential policies may be the better policy
instrument because they can be directed at specific vulnerabilities. In that case, monetary
policymakers would be informed of actions needed. Even without coordination, there would be
gains from avoiding working at cross-purposes (see Adrian , Duarte, and others 2018 for more
discussion).

6 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

FINANCIAL STABILITY MONITORING FRAMEWORK

8. This section presents a stylized conceptual framework for identifying and monitoring
cyclical risks to financial stability. 1 The framework is grounded in macro-financial linkages—those
between the financial sector and the real economy—and in particular in how the financial sector can
propagate and amplify shocks. It makes an important distinction between shocks and macro-
financial imbalances, where shocks are external and hard to predict. On the other hand, macro-
financial imbalances develop endogenously as lenders and borrowers respond to a low price of risk
in the presence of financial frictions; these imbalances then act as amplifiers of shocks (Figure 1).
They include high asset valuations and high leverage in the financial sector. Once imbalances are
sufficiently high, they can amplify negative shocks that cause the price of risk to rise, which can lead
to declines in asset prices and an unwinding of balance sheet leverage, which brings about a
restriction in credit and higher downside risks to growth. In this framework, the degree of financial
stability risks will depend on the severity both of negative shocks and of financial imbalances.

A. Financial Vulnerabilities and Externalities

9. A low price of risk given financial frictions can lead to macro-financial imbalances as
lenders and borrowers respond. The price of risk, or financial market risk appetite, has long been
considered an important factor for macroeconomic fluctuations (Minsky 1986). A negative shock can
cause the price of risk to rise, leading investors to require a higher return for risky projects, leading
to an economic downturn. Conversely, when the price of risk falls, the value of safe bonds falls and
required returns on risky projects fall, and the economy expands. The price of risk is often
represented in empirical studies by a financial conditions index (FCI) composed of asset prices
conditional on the state of the economy. Financial conditions are often an important predictor of
growth, but financial stability assessments should also capture the effects they have on the buildup
of vulnerabilities and conditional downside risks to growth following periods of a low price of risk. 2

1This section is drawn heavily from Adrian and Liang (2018). See also Brunnermeier, Eisenbach, and Sannikov (2013) and
Claessens and Kose (2017) for an extensive survey. There are also important structural vulnerabilities in the financial system
that are important to monitor, such as those related to market structure, but these issues are not necessarily as tightly tied to
the business cycle and endogenous to financial conditions, and so are not discussed in this framework.
2Financial conditions have been found to help predict expected growth. Short-term yields and term spreads on risk-free
securities capture the stance of monetary policy and therefore contain useful information about future economic activity
(Bernanke and Blinder 1992; Ang, Piazzesi, and Wei 2006). Corporate bond spreads signal the default-adjusted marginal return
on business fixed investment (Philippon 2009), and corporate bond risk premiums have been found to reflect the
creditworthiness of financial institutions (Gilchrist and Zakrajšek 2012). There is some evidence that elevated volatility of stock
returns can be a useful predictor of short-term contractions in output, but the predictive power of stock returns is weak
(Campbell 1999; Stock and Watson 2003). Research is ongoing to develop alternative measures of the price of risk or risk
appetite for the macroeconomy, but such indicators would not be available for a broad set of countries of interest for the
GFSR. See, for example, Pflueger, Siriwardane, and Sunderam (2018), who measure risk appetite with the valuations of high-
volatility stocks to low-volatility stocks.

INTERNATIONAL MONETARY FUND 7

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Figure 1. Macro-Financial Linkages: Endogenous Risk-Taking, Financial Vulnerabilities,

and Financial Stability Risks

Source. IMF staff.

10. Financial frictions have been foundational for macro models that include credit cycles.
When lenders face asymmetric information so that there is an external finance premium for
borrowers, loose monetary policy or financial conditions can improve the net worth of borrowers
and through a financial accelerator effect increase credit for household and business spending
(Bernanke and Gertler 1989; extended by Bernanke, Gertler, and Gilchrist 1999). Changes in the net
worth of financial institutions subject to capital constraints also may affect the supply of credit in a
procyclical way and have independent effects on the real economy (Gertler and Kiyotaki 2009,
Gertler and Karadi 2010). Borrowers may not consider externalities when making their individual
borrowing decisions, which can lead to excess credit (Korinek and Simsek 2016). While these
mechanisms establish links between financial conditions and financial stability risks, they generally
do not suggest nonlinear amplification effects that are as sharp as observed in financial crises.

11. The endogenous response of financial intermediaries can lead to higher leverage of
financial intermediaries and greater loan supply and to greater maturity transformation.
Higher asset prices boost capital adequacy and ease risk management constraints of financial
intermediaries, who respond by increasing leverage, short-term funding, and maturity mismatches in
the financial sector (Brunnermeier and Pedersen 2009; Adrian and Shin 2010, 2014; Adrian and
Boyarchenko 2016). Looser capital constraints increase leverage of the marginal investor, reducing
risk premiums on assets (He and Krishnamurthy 2013). Improvements in the prospects of businesses
can increase lending but reduce underwriting standards when banks have private information about
borrowers (Dell’Ariccia and Marquez 2006). Similarly, local currency appreciation is associated with

8 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

improved balance sheets of local borrowers and more highly leveraged banks, which links financial
stability to shocks to exchange rates (Bruno and Shin 2014).

12. When more firms and managers are engaged in the same activities, payoffs for higher
risk may increase. That is, investment mandates and agency costs can lead to higher correlation in
increased risk-taking behavior. For example, there may be more competition to lend in boom
periods, which leads to less screening of potential borrowers and more loans being made. Managers
often are compensated based on relative performance and will do better if they have losses at the
same time as their competitors (Morris and Shin 2014). More highly correlated behavior increases
the risks of systemic banking crises and deeper fire sales.

13. The degree of international financial integration has increased dramatically in the past
few decades, also increasing correlations across countries. There is ample evidence that more
global financial integration and interconnectedness can lead to more transmission and amplification
of shocks through international capital flows. Empirical studies of correlations of asset prices across
countries find evidence of contagion (comovement of returns not related to fundamentals) in
response to exogenous shifts in risk preferences, and spillover effects from distress in the US
financial sector depend on the resilience of the domestic banking sector and credit market
conditions (see Agenor and Pereira da Silva 2018 for a comprehensive review of studies of financial
spillovers across countries).

14. In addition, increases in the complexity of the financial system that lead to loss of
information can result in greater overall uncertainty and nonlinear outcomes. Flight to quality
episodes are triggered by events and unexpected correlations. These make the risk management
models investors rely on obsolete, and they disengage given Knightian uncertainty (Caballero and
Krishnamurthy 2008). Beliefs based on extrapolating the past and neglecting downside risks can
explain why the price of risk can be very low for prolonged periods (Gennaioli and Shleifer 2018).
Neglected downside risks can rationalize how financial systems can become highly leveraged as
agents leverage up when they share the belief that the price of risk is unlikely to increase sharply
and that other agents are somehow protected from negative shocks.

15. Compressed risk premiums can be expected to be followed by a reversal of valuations.

For example, periods of narrow risk premiums for corporate bonds are a useful predictor of negative
returns in subsequent years, which in turn is associated with a contraction of output likely owing to a
pullback in credit supply (López-Salido, Stein, and Zakrajšek 2017). Leverage cycles can also arise as
more optimistic investors that are leveraged need to sell assets, leaving them in the hands of more
pessimistic buyers who value the assets less (Geanakoplos 2009).

16. These vulnerabilities increase financial stability risks and the likelihood of negative
externalities of contagion and fire sales. Fire sales will lead to lower prices and losses for the
seller, but also losses for other holders. If other holders are constrained, they too may be forced to
sell. Through negative feedback loops, fire sales can trigger a sharp contraction in credit and
decrease in real output.

INTERNATIONAL MONETARY FUND 9

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

B. Financial Vulnerabilities and Amplification of Shocks

17. Negative shocks cause the price of risk to increase, and the effect on the real economy
will depend on the degree of vulnerability (Figure 2). A first amplification effect of a negative
shock and an increase in the price of risk is a fall in asset prices. The size of the fall will depend on
whether assets are undervalued or overvalued, with sharper price falls if assets are overvalued (high
asset valuations). A second amplification effect of an increase in the price of risk is through financial
vulnerabilities. A repricing of assets will be amplified if financial firms are highly leveraged and are
forced to deleverage and sell assets in fire sales, which would lead then to a further repricing
(Brunnermeier and Pedersen 2009; Greenwood, Landier, and Thesmar 2015). The net worth of
borrowers falls and risk-management constraints of lenders become binding, leading to declines in
credit, output, and inflation.

Figure 2. Transmission and Amplification of Shocks and Risks to the Macroeconomy

Source: IMF staff.

Note: FCI = financial conditions index.

18. Risks to financial stability, measured as downside risks to output growth, will be
greatest when both asset price valuations and financial vulnerabilities are high (the red circle
and red rectangle in Figure 2). Declines have the potential to lead to a negative feedback loop
between output, price of risk, and thus fire sales and contagion as elevated asset prices and high
vulnerabilities unwind, leading to sharp nonlinear declines in growth. When both asset price
valuations and financial vulnerabilities are low (the blue circle and blue rectangle in Figure 2), an

10 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

increase in the price of risk from a negative shock will have a much more muted effect on asset
prices and credit supply, and thus the economy. If instead financial vulnerabilities are low when asset
valuations are high, the effect of an increase in the price of risk likely would be a large rise in
financial market volatility but not a substantial magnification of consequences for output, especially
if monetary policy can respond to increase aggregate demand. An oft-cited example is the deflating
of the tech bubble in the United States in 2000, which resulted in a modest recession with little
imprint on financial intermediaries.

19. This framework implies that the costs of preventing high financial vulnerabilities have
the benefits of mitigating a steep rise in the price of risk and sharp downside risks to output
growth in the event of a large adverse shock. Policies aimed at slowing the buildup or reducing
financial vulnerabilities will likely impose costs at times when risks are not necessarily apparent. That
is, policies focused on making the financial system more resilient, and thus less likely to amplify
shocks, will result in a higher price of risk in periods with small negative shocks and low volatility.

MATRIX OF VULNERABILITIES TO MEASURE

FINANCIAL STABILITY RISKS
20. The financial vulnerabilities considered in this financial stability framework are shown
below in two matrices (Figures 3 and 4), with selected examples of indicators that would be
monitored and tracked over time. The column headings are broad financial vulnerabilities,
including asset price valuations and market liquidity, leverage, maturity and liquidity mismatch,
external debt claims and currency mismatch, and interconnections and complexity. The row
headings are different parts of the financial sector or markets. The matrix form highlights the
commonality of vulnerabilities, such as leverage, across a wide variety of financial firms (banks,
nonbanks, and market-based intermediaries) as well as different parts of the nonfinancial sector
(households, businesses, and governments). Likewise, valuations and market liquidity and
functioning can be monitored across many types of asset markets, such as sovereign, corporate,
equity, foreign exchange, and real estate. Entries in the cells are shown only for illustration of
concepts that analysts should try to capture.

21. Many of the variables are the same as those that track financial conditions and credit
availability for regular macroeconomic forecasting. But the focus for financial stability is on the
degree to which they would amplify a negative shock and create negative externalities. For example,
lower borrowing costs and higher credit availability to households and businesses are considered a
standard transmission channel for monetary policy, but when accompanied by compressed risk
premiums and weak underwriting standards, the likelihood of externalities and nonlinear
amplification effects would be higher.

INTERNATIONAL MONETARY FUND 11

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Figure 3. Macro-Financial Imbalances: Asset Markets

Examples of indicators that can be monitored
Asset Price Valuations and Market Liquidity

Short-term Funding LIBOR-OIS spreads

Sovereign Debt Term premiums

Risk spreads
Volatility
Market depth
Trading volumes
Corporate Debt Risk premiums
Underwriting standards
Market depth
Trading volumes
Equities Equity risk premium
Implied volatility
Volatility risk premium
Market depth
Trading volumes
Foreign Exchange Cross-currency swaps
FX implied volatility
Market depth
Trading volumes
Real Estate— House price growth
Residential
House-price-to-rent deviation
Lending standards
Real Estate— Commercial property price growth
Commercial
Commercial-price-to-income deviation
Lending standards

Source: IMF staff.

Note: FX = foreign exchange; LIBOR = London interbank overnight rate; OIS = overnight
indexed swap.

12 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Figure 4. Macro-Financial Imbalances: Financial Vulnerabilities

Examples of indicators that can be monitored
External Debt Claims
Maturity and Interconnections and
Leverage and Currency
Liquidity Mismatch Complexity
Mismatch
Banking - Regulatory capital - Short-term wholesale - US$ funding needs - Interbank claims
Sector, - Stress test capital funds ratio - Cross-border funding - Nonbank financial
Depository - Market-based capital - Liquid asset ratios - Reliance on cross- claims
Institutions measures - Regulatory liquidity currency FX swaps - Cross-border activities
- Off-balance-sheet - Asset-liability duration - Price-based systemic
assets and derivatives gap risk measures
- Collateral eligible for
the discount window
Nonbank - Regulatory capital - Short-term wholesale - Open-end and other - Claims on banks
Financial Firms - Leverage ratios funds ratio funds invested in - Claims on other
and Market- - Off-balance-sheet - Carry trades foreign debt nonbank institutions
Based Finance assets and derivatives - Open-end funds and - Financial innovations
- Securitizations (risk exchange-traded funds that introduce
retention) (with less liquid assets) complexity
- Margin credit - Common business
- Collateralized models (e.g., index
borrowing and haircuts funds)

Central - Capital - Liquidity lines - Members provide

Counterparties - Default fund services to CCPs
(CCPs) - Margins - Members are
- Credit lines connected to multiple
CCPs
Private - Credit to GDP - Debt with adjustable - Debt overhang
Nonfinancial— - Credit growth rates - Home foreclosure
Households - Debt service externalities
- Lending standards
Private - Credit to GDP - Short-term debt - Debt issued in
Nonfinancial— - Credit growth - Adjustable-rate debt foreign currencies
Business - Interest coverage - Liquid assets
- Lending standards - Liquidity and depth of
securities market
Government - Government debt to - Debt maturity profile - External debt
Sector GDP - Short-term debt - US dollar versus local
- Debt growth - Liquidity and depth of currency debt
- Off-balance-sheet market - Short-term debt to
liabilities foreign exchange
reserves
- Capital flows
Source: IMF staff.

INTERNATIONAL MONETARY FUND 13

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

22. The first chapters of recent GFSR reports have highlighted various parts of these
matrices. These measures are consistent with IMF guidance developed for bilateral advice (IMF
2014). For example, valuation metrics for equities, corporate bonds, and house prices for some
major countries and regions were shown in the October 2017 and April 2018 GFSR reports.
Measures of leverage based on balance sheets were discussed in the October 2018 GFSR for several
countries and regions (Figure 5). In the most recent, April 2019, GFSR an index of financial
vulnerability by sector for some countries and regions is illustrated by a spider chart (Figure 6).

Figure 5. Balance-Sheet Leverage by Sector and Region

Source: IMF, Chapter 1 of the October 2018 Global Financial Stability Report.

14 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Figure 6. Financial Vulnerabilities by Sector and Region

Source: IMF, April 2019 Global Financial Stability Report (GFSR).

23. These types of presentations emphasize the value of greater consistency of measures
across countries to improve multilateral surveillance over time. These figures would have
flagged some key vulnerabilities ahead of the financial crisis, such as high household leverage in the
United States (Figure 5) and high vulnerabilities in banks and nonbank financial institutions globally
(Figure 6). Nonetheless, the framework needs to be flexible and able to incorporate other potential
emerging vulnerabilities because the specific manifestation of vulnerabilities that will pose
substantial risks to financial stability in the future may differ from those that led to high risks in the
past.

INTERNATIONAL MONETARY FUND 15

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

24. Filling out the matrices in Figures 3 and 4 could be challenging for many countries or
regions because of lack of data. However, while such data may not be available initially,
establishing a regular monitoring matrix should foster investment in better, more consistent data
that will allow for deeper analysis of the metrics and better empirical models once the data are filled
in. Also, the matrices are designed to be flexible, so that they can adjust with changes in the financial
system and incorporate financial innovations that affect risk-taking and correlated behavior.

AGGREGATE MEASURE OF FINANCIAL STABILITY

RISKS: GROWTH-AT-RISK APPROACH
25. This section describes the GaR measure of financial stability risks for multilateral
surveillance. GaR is a summary top-down measure of risks to financial stability arising from
financial conditions. 3 It captures downside risks to GDP growth, which is especially useful when
financial conditions affect different parts of the distribution in different ways. Specifically, GaR is
defined as a low percentile of the conditional GDP growth distribution; the lower 5th percentile of
the distribution is chosen here, though other percentiles are possible. That is, a GaR value indicates
that there is a 5 percent probability that forecast growth will be lower than that value. GaR was
introduced in the GFSR in April 2017, and the GaR estimates presented in the discussion that follows
represent continued work to improve the methodology and broaden its applicability. The discussion
then presents a term structure of GaR—that is, how it varies over a projection horizon of three years
based on initial financial conditions. The term structure illustrates whether or not looser financial
conditions that reduce downside risks in the near term can be sustained into the medium term.

26. GaR has important benefits for policymaking because it expresses risks directly in
terms of output growth, which is ultimately the metric for welfare. Summary measures of
financial stability risks could also include measures of the cost of fire-sale externalities in terms of
loss of bank capital (Greenwood, Landier, and Thesmar 2015), the probability of multiple bank
failures (Jin and De Simone 2014), or conditional value at risk (Adrian and Brunnermeier 2016), but
those measures are not easily translated into risks in terms of economic activity. Work is ongoing to
model how macroprudential and monetary policies would affect GaR. Thus, the current GaR
framework does not offer policy prescriptions.

A. Estimating Growth at Risk

27. To illustrate the measure, the discussion first presents the results from empirical
estimations based on two panels, one of 11 advanced economies and another of 11 emerging
market economies. The GDP growth distribution is forecast as a function of a financial conditions
index, GDP growth, inflation, and indicators of financial vulnerabilities, specifically credit growth and

3 See Prasad and others (2019) for the use of GaR in bilateral surveillance and a description of some country case studies.

16 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

a dummy variable for a credit boom, a dummy variable for each country, and a constant. The
analysis uses quantile regressions, which allow for more general modeling of the functional form of
the GDP distribution.

28. FCIs are constructed for each country to capture funding and credit costs, which
represent the underlying price of risk. The FCIs are estimated by controlling for current
macroeconomic conditions, and thus are more than a measure of the unconditional cost of funds. 4
Up to 17 variables are used, including domestic and global financial price indicators, corporate
credit risk spreads, equity prices, volatility, and foreign exchange for each country. 5 In addition,
financial vulnerabilities are measured by growth in credit to GDP (Borio, Drehmann, and Tsatsaronis
2011 show the importance of credit) and a credit boom dummy variable, which is the interaction of
high credit-to-GDP growth and a high FCI. These conditions represent the type of environment
when risk-taking would be greatest.

29. Figure 7 illustrates key features of the distribution of forecast GDP growth and
indicates that volatility is not constant and risks to GDP growth are more skewed to the
downside than upside. The one-year-ahead distribution of forecast GDP growth shows that when
the median projected growth is lower, so is the 5th percentile. In contrast, there is little variability at
the 95th percentile, suggesting greater variability for downside risk than upside risk. The differences
in variability emphasize the importance of risks around a central tendency for growth and of
measures of financial stability risks that can capture changing volatility.6

4The FCIs are estimated based on Koop and Korobilis (2014) and build on a time-varying parameter vector autoregression
model (Primiceri 2005). See Adrian, Grinberg, Liang, and Malik (2018) for more details.
5 The variables include interbank spread, corporate spread, sovereign spread, term spread, equity returns, equity return
volatility, change in real long-term rate, MOVE, house price returns, percent change in the equity market capitalization of the
financial sector to total market capitalization, equity trading volume, expected default frequencies for banks, market
capitalization for equities, market capitalization for bonds, domestic commodity price inflation, foreign exchange moves, and
VIX. These data are the same as those used to construct the FCIs that were used in the October 2017 GFSR. We use a more
general flexible method to control for current macroeconomic conditions and to account for the lack of availability of some
data for the full estimation period. We also exclude two credit variables because we are interested in the interaction of price
terms and credit and thus do not want credit to also be in the FCI, although this change does not materially change the FCI
when most other data series are available.
6Notably, the conditional distribution for inflation forecasts does not exhibit the same degree of asymmetry, suggesting
constant variance is a more reasonable assumption.

INTERNATIONAL MONETARY FUND 17

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Figure 7. One-Year-Ahead GDP Growth Forecasts Conditional on Financial Conditions

Source: Adrian, Grinberg, and others (2018).

Note: AE = advanced economy; EME = emerging market economy.

B. Estimating the Term Structure of Downside Risks

30. Figure 8 illustrates that the effects of financial conditions on the median and 5th
percentile of GDP growth vary over the projection horizon. Coefficient estimates of the FCI for
the lower 5th percentile (red line) from panel quantile regressions differ significantly from
coefficients for the median (blue line) over the near-term projection horizon for both advanced
economies and emerging market economies. 7 The negative coefficients in near-term quarters for
the 5th percentile are economically large and negative, indicating that the marginal effects of looser
financial conditions (a decrease in the FCI) are a significant decrease in downside risk. The larger
changes in the coefficients for the 5th percentile relative to the median over the projection horizon
illustrate that the expected growth distribution shifts significantly over the projection horizon.
Moreover, the reversal in the signs of the coefficients on FCI for the 5th percentile suggests that
there is an important intertemporal trade-off for loose financial conditions—that reduced downside
risks in the near term are not sustained and abate significantly in the medium term.

7
GDP growth is defined as average quarterly growth for the cumulative period ending in quarters 1 through 12, at an annual
rate.

18 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Figure 8. Estimated Coefficients on FCI for GaR and Median Growth, Advanced Economies
and Emerging Market Economies

Source: Adrian, Grinberg, and others (2018).

Note: The panels plot the estimated coefficients on the financial conditions index (FCI) from panel quantile
regressions for the median and the 5th percentile (GaR) for one to twelve quarters into the future. Estimates are
based on local projection estimation methods, and standard errors are from bootstrapping techniques; bands
represent plus or minus one standard deviation. Advanced economies (AEs) comprise 11 countries, with data for
most from 1973 to 2017. Emerging market economies (EMEs) comprise 11 countries, with data for most from 1996
to 2017.

31. The shift in the conditional distribution of GDP growth is consistent with buildups of
macro-financial imbalances over the projection horizon in response to loose financial
conditions, consistent with research on macro-financial linkages. When financial conditions
initially are loose and risk management constraints are less binding, projected GDP growth is higher
and its distribution is tighter. However, the loose financial conditions allow vulnerabilities to build
through various mechanisms when there are financial frictions, which then leads to a sharper rise in
downside volatility of GDP growth when the system is hit by a shock. The change in coefficients is
consistent with a leverage cycle, as in Geanakoplos (2009) or Adrian and Shin (2010), which
highlights an intertemporal trade-off where loose financial conditions raise growth and reduce
volatility in the near term, but increase volatility in the medium term because of endogenous
buildups of vulnerabilities.

32. The probability distribution for projected GDP growth can be depicted for a
representative country for selected forecast quarters to illustrate GaR and its term structure.
In particular, the forecast growth distributions for an average country in the panel of 11 advanced
economies for two projection periods h, at 4 and 10 quarters, conditional on an initial loosest FCI
(top 1 percent) and a credit boom (interaction of high credit growth and loose FCI), shown in Figure
9, panel 1, illustrates two concepts: first, the distribution in the near term (at projection quarter h =
4, gold line) has a higher median and lower variance than the distribution in the medium term (at

INTERNATIONAL MONETARY FUND 19

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

projection quarter h = 10, green line). Second, the distribution in the near term has a much smaller
left tail (less downside risk) than the distribution in the medium term. 8 That is, downside risk is much
greater at ten quarters ahead than at four quarters ahead.

33. The probability distribution can be estimated for each forecast quarter h, and the 5th
percentile for each h can be plotted to trace out the term structure of GaR, as shown in the
right panel. The term structure of GaR conditional on high FCI and a credit boom, shown in Figure
9, panel 2, illustrates that downside risks are lower in near-term quarters than in quarters further
ahead, indicating that the lower tail of the forecast growth distribution gets fatter over time.

34. Many studies have linked financial conditions to expected growth; indeed, monetary
policy typically affects the economy through its impact on financial conditions. But the analysis
shows that financial conditions disproportionately affect the lower tail of the distribution of forecast
growth. Moreover, the effect of financial conditions switches signs over the projection horizon, with
initial looser financial conditions reducing downside risks to growth in the near term but increasing
downside growth risks in the medium term. These results are robust to other estimation techniques.
However, lack of data or less significant effects of financial sector risk-taking and credit on expected
growth are limitations of applying this model to every country.

Figure 9. Probability Distribution of Forecast GDP Growth and Growth at Risk for Loose
Financial Conditions and a Credit Boom
1. Projected GDP Growth: AE 2. Term structures of GaR by initial FCI, AE
(loosest FCI, credit boom) (loosest FCI, credit boom)

Source: Adrian, Grinberg, and others (2018).

Note: AE = advanced economy; FCI = financial conditions index; GaR = growth at risk.

8The distribution shown is the average for the panel of advanced economies and is one possible presentation approach for
multilateral surveillance. Another approach would be to show a weighted average, based on country GDP or financial sector
importance to GDP aggregated up to advanced economies and emerging market economies separately or to advanced
economies and emerging market economies combined.

20 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

C. Quantifying Downside Risks to Global GDP in the Near Term and

Medium Term

35. Global GaR, estimated using global GDP and a global FCI, was first used to
communicate an aggregate top-down view of financial stability risks in April 2018 (Chapter 1
of the GFSR). The methodology for GaR had been introduced earlier in Chapter 3 of the GFSR in
October 2017. Global GDP is the aggregate GDP for 43 countries. The global FCI is based on
financial conditions indices for these areas, including the 29 jurisdictions with systemically important
financial sectors.

36. The April 2019 GFSR expanded on how this financial stability monitoring framework
is being implemented. In particular, there was more consistent reporting of financial conditions,
financial vulnerabilities by sectors, and GaR (country, region, or global). The global FCI is shown in
Figure 10 (panel 1), and it loosened from the previous quarter, though was not as loose as at the
time of the October 2018 GFSR (denoted by 2018:Q3). Conditional on global FCI, the densities of
forecast global growth for one-year ahead (panel 2) suggested an improvement in the outlook for
downside risks at the time of the April 2019 GFSR relative to the previous quarter. The one-year-
ahead GaR forecast (panel 3) rose to near the upper range of its historical distribution. However,
GaR forecasts for three years ahead (panel 4) are less favorable, though they suggest downside risks
are less severe than forecast in late 2017, when very loose global financial conditions set the stage
for a possible buildup of vulnerabilities.

INTERNATIONAL MONETARY FUND 21

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Figure 10. Global Financial Conditions Index and Growth-at-Risk Estimates

1. Global Financial Conditions Index 2. Global Growth Forecast Densities

(Standard deviations) (Probability density)

3. Near-Term GaR Forecasts 4. Medium-Term GaR Forecasts

(Percentile rank) (Percentile rank)

Source: IMF, April 2019 Global Financial Stability Report.

Note: GaR = growth at risk.

37. While global GaR does not attribute the medium-term downside risks to any particular
vulnerability, indicators in the monitoring matrices can help identify possible contributors.
One likely contributor is greater indebtedness of borrowers, which had been rising in some
countries or regions and in some sectors in recent years. The spider map and heat map of financial
vulnerabilities (Figure 6) highlight elevated sovereign debt, household debt, and nonfinancial

22 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

business debt in a number of regions, in addition to high leverage at banks and other financial firms
in China as sources of financial vulnerability.

38. A future measure of global GaR could try to capture financial vulnerabilities and cross-
border interconnections. Work will continue to improve on GaR measures in two ways. First,
indicators of financial vulnerability, as in Figure 6, can be included in estimates of global GaR in the
future, similarly to the way they were included in the panel estimates discussed in the previous
section. This will allow a richer assessment of which vulnerabilities present significant risks. Second,
contributions by individual countries to global GaR may vary in ways that are not reflected solely by
GDP weights. The difference in potential contributions can be seen by the high variability in
vulnerabilities. Differences in contributions might also arise because of differences in the degree of
interconnection to global activity or because a country is a more significant financial center than
another country of similar size. The Adrian and Brunnermeier (2016) conditional value at risk method
to estimate systemic risk contributions might be one way to develop this new global GaR measure.
These authors define conditional variance of risk as a metric for systemic risk contribution, based on
value at risk as a metric of risk.

VULNERABILITIES AND MACROPRUDENTIAL POLICY

TOOLS
39. A systematic approach to monitoring cyclical risks to financial stability is the
foundation for implementing better macroeconomic stabilization policies. An IMF guidance
note (2014) for bilateral surveillance provides a link between types of financial vulnerabilities
illustrated in the matrix in Figure 4 and the types of macroprudential tools that could be used to
address them. The approach for multilateral surveillance discussed in this paper also can foster
better policies globally, even when policies are implemented by domestic authorities. A global GaR
could provide insight on cross-country financial spillovers that could feed into multilateral and
bilateral advice. This is becoming more important as the degree of international financial integration
has been increasing dramatically.

40. The IMF recently launched a new annual survey on the use of macroprudential policies
(IMF 2018), and the policies can be mapped to the financial vulnerabilities in the matrices
shown in Figures 3 and 4. The initial survey was sent in early 2017 and asked countries to self-
report the use of macroprudential tools across categories of tools that relate to potential sources of
vulnerabilities (identified in IMF 2014). Tools include those that would apply to credit exposures of
banks, liquidity and foreign exchange mismatches of banks, liquidity and fire-sale risks of nonbanks,
and risks from systemically important financial institutions. The survey also reports on institutional
frameworks for setting macroprudential policies, including the role of the central bank, financial
regulators, and financial stability committees. In this way, the survey links the work on monitoring
financial stability risks to assessing targeted macroprudential policy tools that countries could use to
reduce those risks.

INTERNATIONAL MONETARY FUND 23

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

41. The survey finds that many countries had the authority and used structural
macroprudential tools to reduce balance sheet vulnerabilities at banks. Most countries report
the availability of tools to manage leverage and liquidity in the banking sector and insurers (Figure
11). Many also report tools to manage banks’ risks from exposures to households and businesses.
For liquidity and FX mismatches, the liquidity coverage ratio, net stable funding ratio, and net
foreign exchange positions were the three most used tools. However, fewer countries reported
having the authority or using tools to address maturity and foreign exchange (FX) mismatch
vulnerabilities of nonbank lenders or financial markets in which banks and nonbanks participate.
Systematic reporting of matches by authorities and use of tools by countries with elevated financial
vulnerabilities are an important element of multilateral surveillance for the GFSR.

Figure 11. Macroprudential Tools for Addressing Financial Vulnerabilities

Source: IMF, April 2019 Global Financial Stability Report.

42. The survey, by providing more comprehensive data, also facilitates much-needed
research to evaluate the effectiveness of alternative policies to improve the practice of setting
macroprudential policies. Research findings to date suggest some success in reducing
vulnerabilities with macroprudential tools, but experiences have been limited. For example, Cerutti,
Claessens, and Laeven (2015) find borrower-based tools, such as loan to value and debt service to
income, can significantly reduce household credit growth, but the effects are smaller in open
economies, and there is some evidence of avoidance as the use of tools comes with greater cross-

24 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

border borrowing. 9 Akinci and Olmstead-Rumsey (2018) also find significant effects for tightening
loan to value, debt service to income, and other housing measures on credit and house prices,
though mostly in emerging market economies.

43. The survey also emphasizes the institutional structures for setting macroprudential
policies and provides valuable data for more research on what structures are effective for
taking actions to reduce financial stability risks. Based on responses from 111 countries that
report having a macroprudential authority, 80 countries indicate a significant role for the central
bank consistent with IMF principles on macroprudential policy based on research that suggests
more timely action by central bank leadership to reduce credit growth (IMF 2014). More recent
research documents the rapid growth of multiagency financial stability committees since the global
financial crisis and the increased role of the Ministry of Finance in setting policies (Edge and Liang
2019). The increasingly wide range of practices and limited evidence on effectiveness indicate that it
is important to better understand the motivations for these structures and the implications for
macroprudential policymaking.

44. Further research will allow for counterfactual policy analysis for the joint setting of
macroprudential and monetary policies to achieve growth and stability. Adrian and Duarte
(2017) add financial vulnerability to a commonly used model of the macroeconomy, specifically a
New Keynesian model, and show that optimal monetary policy would differ from a standard Taylor
rule, even when monetary policy pursues an inflation target. Additional work to add
macroprudential policy is ongoing (see Adrian 2018).

CONCLUSIONS
45. This paper describes the conceptual framework in the GFSR, which has been evolving
for multilateral surveillance to enhance transparency and communication about the
assessment of cyclical financial stability risks. It is grounded in macro-financial linkages—those
that link the financial sector to macroeconomic growth and stability. Research has highlighted that
many macro-financial linkages had been overlooked by policymakers and academia in the run-up to
the global financial crisis. While some vulnerabilities, such as high borrower leverage or significant
maturity mismatch in financial firms, have been found to be common to many financial crises, the
conceptual framework emphasizes that monitoring also should look ahead for different
manifestations of vulnerabilities, especially as financial integration across countries has been
increasing.

46. In addition, the new GaR measure emphasizes the importance of paying attention to
the entire distribution of forecast growth from financial conditions rather than any single
point estimates when evaluating growth and stability. Moreover, GaR emphasizes the

9Cerutti and others (2016) document that many tools used by those countries have not varied frequently over time,
suggesting that many were not used to offset cyclical vulnerabilities: loan to value was the most frequently adjusted, followed
by changes in reserve requirements (not for monetary policy purposes).

INTERNATIONAL MONETARY FUND 25

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

importance of paying attention to how forecast risks to growth are expected to evolve over time as
well, because actions to loosen financial conditions to boost growth and reduce volatility in the near
term can incentivize greater risk-taking and lead to a buildup of vulnerabilities, which can increase
downside risks to growth in the medium term.

47. The proposed monitoring framework of vulnerabilities will also contribute to more
effective macroprudential policies. The framework emphasizes the value of consistent metrics to
improve both bilateral and multilateral surveillance, which can improve communication and
understanding of financial stability risks among macroprudential policymakers. Combined with
better data on the use and effectiveness of macroprudential tools to target specific vulnerabilities,
this work provides a foundation for systematic assessments and policy implementation to reduce
financial stability risks.

26 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

REFERENCES

Acharya, Viral V., Lasse H. Pedersen, Thomas Philippon, and Matthew Richardson. 2017. “Measuring
Systemic Risk.” Review of Financial Studies 30 (1): 2–47.

Adrian, Tobias. 2018. “Alternative Monetary Policy Paths and Downside Risk.” Remarks at European
Central Bank Conference on Monetary Policy, October 29.

———, and Nina Boyarchenko. 2016. “Intermediary Leverage Cycles and Financial Stability.” Federal
Reserve Bank of New York Staff Report 567.

———, and Domenico Giannone. 2017. “Vulnerable Growth.” Federal Reserve Bank of New York
Staff Report 794, American Economic Review, forthcoming.

Adrian, Tobias, and Markus Brunnermeier. 2016. “CoVar.” American Economic Review 106 (7): 1705–
41.

Adrian, Tobias, Daniel Covitz, and Nellie Liang. 2015. “Financial Stability Monitoring.” Annual Review
of Financial Economic 7 (December): 357–95.

Adrian, Tobias, and Fernando Duarte. 2017. “Financial Vulnerability and Monetary Policy.” Federal
Reserve Bank of New York Staff Report 804. Revised September 2017.

———, Tomaso Mancini-Griffoli, and Federico Grinberg. 2018. “Financial Conditions.” In Advancing
the Frontiers of Monetary Policy Making, edited by T. Adrian, D. Laxton, and M. Obstfeld,
Washington, DC: International Monetary Fund.

Adrian, Tobias, Federico Grinberg, Nellie Liang, and Sheheryar Malik. 2018. “The Term Structure of
Growth at Risk.” IMF Working Paper 18/180, International Monetary Fund, Washington, DC.

Adrian, Tobias, and Nellie Liang. 2018. “Monetary Policy, Financial Conditions, and Financial
Stability.” International Journal of Central Banking 14 (1): 73–131.

Adrian, Tobias, and Hyun Song Shin. 2010. “The Changing Nature of Financial Intermediation and
the Financial Crisis of 2007–09.” Federal Reserve Bank of New York Staff Report 439. Revised
April 2010.

———. 2014. “Procyclical Leverage and Value-at-Risk.” Review of Financial Studies 27 (2): 373–403.

INTERNATIONAL MONETARY FUND 27

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Agenor, Pierre-Richard, and Luiz Pereira da Silva. 2018. “Financial Spillovers, Spillbacks, and the
Scope for International Macroprudential Policy Coordination.” BIS Paper 97, Bank for
International Settlements, Basel.

Aikman, David, Jonathan Bridges, Stephen Burgess, Richard Galletly, Iren Levina, Cian O’Neill, and
Alexandra Varadi. 2018. “Measuring Risks to Financial Stability.” Bank of England Working
Paper 738, London.

Akinci, Ozge, and Jane Olmstead-Rumsey. 2018. “How Effective Are Macroprudential Policies? An
Empirical Investigation.” Journal of Financial Intermediation 33 (C): 33–57.

Ang, Andrew, Monika Piazzesi, and Min Wei. 2006. “What Does the Yield Curve Tell Us about GDP
Growth?“ Journal of Econometrics 131 (1–2): 359–403.

Bernanke, Ben S., and Alan S. Blinder. 1992. “The Federal Funds Rate and the Channels of Monetary
Transmission.” American Economic Review 82 (4): 901–21.

Bernanke, Ben, and Mark Gertler. 1989. “Agency Costs, Net Worth, and Business Fluctuations.”
American Economic Review 79 (1): 14–31.

———, and Simon Gilchrist. 1999. “The Financial Accelerator in a Quantitative Business Cycle
Framework.” In Handbook of Macroeconomics, vol. 1, edited by J. B. Taylor and M. Woodford,
1341–93. Amsterdam: Elsevier Science.

Blancher, Nicolas, Srobona Mitra, Hanan Morsy, Akira Otani, Tiago Severo, and Laura Balderrama.
2013. “Systemic Risk Monitoring (SysMo) Toolkit—A User Guide.“ IMF Working Paper
13/168, International Monetary Fund, Washington, DC.

Borio, Claudio, Mathias Drehmann, and Kostas Tsatsaronis. 2011. “Anchoring Countercyclical Capital
Buffers: The Role of Credit Aggregates.” International Journal of Central Banking 7 (4): 189–
240.

Borio, Claudio, and Philip Lowe. 2002. “Asset Prices, Financial and Monetary Stability: Exploring the
Nexus.” BIS Working Paper 114, Bank for International Settlements, Basel.

Brunnermeier, Markus K., Thomas Eisenbach, and Yuliy Sannikov. 2013. “Macroeconomics with
Financial Frictions: A Survey.” In Advances in Economics and Econometrics: Tenth World

28 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Congress, edited by Daron Acemoglu, Manuel Arellano, and Eddie Dekel. New York: Cambridge
University Press.

Brunnermeier, Markus K., and Lasse Heje Pedersen. 2009. “Market Liquidity and Funding Liquidity.”
Review of Financial Studies 22 (6): 2201–38.

Bruno, Valentina, and Hyun Song Shin. 2014. “Cross-Border Banking and Global Liquidity.” Review of
Economic Studies 82 (2): 535–64.

Caballero, Ricardo, and Arvind Krishnamurthy. 2008. “Collective Risk Management in a Flight to
Quality Episode.” Journal of Finance 63 (5, October): 2195–230.

Campbell, John. 1999. “Asset Prices, Consumption, and the Business Cycle.” In Handbook of
Macroeconomics, vol. 1, edited by J. B. Taylor and M. Woodford, 1231–303. Amsterdam:
Elsevier Science.

Cerutti, Eugenio, Stijn Claessens, and Luc Laeven. 2015. “The Use and Effectiveness of
Macroprudential Policies: New Evidence.” IMF Staff Discussion Note 15/61, International
Monetary Fund, Washington, DC.

Cerutti, Eugenio, Ricardo Correa, Elisabetta Fiorentino, and Esther Segalla. 2016. “Changes in
Prudential Policy Instruments—A New Cross-Country Database.” International Finance
Discussion Paper 1169, Board of Governors of the Federal Reserve System.

Claessens, Stijn, and Ayhan Kose. 2017. “Macroeconomic Implications of Financial Imperfections: A
Survey.” BIS Working Paper 677, Bank for International Settlements, Basel.

Dell’Ariccia, Giovanni, and Robert Marquez. 2006. “Lending Booms and Lending Standards.” Journal
of Finance 61 (5): 2511–46.

De Nicolo, Gianni, Giovanni Favara, and Lev Ratnovski. 2012. “Externalities and Macroprudential
Policy.” IMF Staff Discussion Note 12/05, International Monetary Fund, Washington, DC.

Edge, Rochelle, and Nellie Liang. 2019. “New Financial Stability Governance Structures and Central
Banks.” Hutchins Center Working Paper 50, Brookings Institution, Washington, DC. Update of
Hutchins Center Working Paper 32, published in 2017 with the same title.

INTERNATIONAL MONETARY FUND 29

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Gaspar, Vitor, Maurice Obstfeld, and Ratna Sahay. 2016. “Macroeconomic Management When Policy
Space Is Constrained.” IMF Staff Discussion Note 16/09, International Monetary Fund,
Washington, DC.

Geanakoplos, John. 2009. “The Leverage Cycle.” In NBER Macroeconomics Annual 2009, vol. 24,
edited by Daron Acemoglu, Kenneth Rogoff, and Michael Woodford, 1–66. University of
Chicago Press.

Gennaioli, Nicola, and Andrei Shleifer. 2018. A Crisis of Beliefs: Investor Psychology and Financial
Fragility. Princeton, NJ: Princeton University Press.

Gertler, Mark, and Peter Karadi. 2010. “A Model of Unconventional Monetary Policy.” Journal of
Monetary Economics 58 (1): 17–34.

Gertler, Mark, and Nobuhiro Kiyotaki. 2009. “Financial Intermediation and Credit Policy in Business
Cycle Analysis.” In Handbook of Monetary Economics, vol. 3, edited by B. M. Friedman and M.
Woodford, 547–99. Amsterdam: Elsevier Science.

Gilchrist, Simon, and Egon Zakrajšek. 2012. “Credit Spreads and Business Cycle Fluctuations.”
American Economic Review 102 (4): 1692–720.

Greenwood, Robin, Augustin Landier, and David Thesmar. 2015. “Vulnerable Banks.” Journal of
Financial Economics 115 (3, March): 471–85.

He, Zhiguo, and Arvind Krishnamurthy. 2013. “Intermediary Asset Pricing.” American Economic
Review 103 (2): 1–42.

International Monetary Fund (IMF). 2014. Staff Guidance Note on Macroprudential Policy,
Washington, DC.

———. 2017. “Growth at Risk: A Macroeconomic Measure of Financial Stability.” Chapter 3 in the
Global Financial Stability Report, Washington, DC, October.

———. 2018. The IMF’s Annual Macroprudential Policy Survey–Objectives, Design, and Country
Responses. Washington, DC: International Monetary Fund.

Jin, Xisong, and Francisco de A. Nadal De Simone. 2014. “Banking Systemic Vulnerabilities: A Tail-risk
Dynamic CIMDO Approach.” Journal of Financial Stability 14 (October): 81–101.

30 INTERNATIONAL MONETARY FUND

A MONITORING FRAMEWORK FOR GLOBAL FINANCIAL STABILITY

Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2013. “When Credit Bites Back.” Journal of
Money, Credit and Banking 45 (2): 3–28.

Koop, Gary, and Dimitris Korobilis. 2014. “A New Index of Financial Conditions.” European Economic
Review 71 (C): 101–16.

Korinek, Anton, and Alp Simsek. 2016. “Liquidity Trap and Excessive Leverage.” American Economic
Review 106 (3): 699–738.

López-Salido, David, Jeremy C. Stein, and Egon Zakrajšek. 2017. “Credit-market Sentiment and the
Business Cycle.” Quarterly Journal of Economics 132 (3): 1373–426.

Minsky, Hyman P. 1986. Stabilizing an Unstable Economy. New Haven, CT: Yale University Press.

Morris, Stephen, and Hyun Song Shin. 2014. “Risk-Taking Channel of Monetary Policy: A Global
Game Approach.” Unpublished working paper, Princeton University, Princeton, NJ.

Pflueger, Carolin, Emil Siriwardane, and Adi Sunderam. 2018. “A Measure of Risk Appetite for the
Macroeconomy.” NBER Working Paper 24529, National Bureau of Economic Research,
Cambridge, MA.

Philippon, Thomas. 2009. “The Bond Market’s q*.” Quarterly Journal of Economics 124 (3): 1011–56.

Prasad, Ananthakrishnan, Selim Elekdag, Phakawa Jeasakul, Romain Lafarguette, Adrian Alter, Alan
Xiaochen Feng, and Changchun Wang. 2019. “Growth at Risk: Concept and Application in
IMF Country Surveillance.” IMF Working Paper 19/36, International Monetary Fund,
Washington, DC.

Primiceri, Giorgio E. 2005. “Time Varying Structural Vector Autoregressions and Monetary Policy.”
Review of Economic Studies 72 (3): 821– 52.

Stock, James, and Mark Watson. 2003. “Forecasting Output and Inflation: The Role of Asset Prices.”
Journal of Economic Literature 41 (3, September): 788–829.

INTERNATIONAL MONETARY FUND 31