In this study, we estimate a Bayesian global vector autoregressive model to uncover the effects of financial stress on output growth, inflation, and interest rates, accounting for several advanced and emerging economies for a period spanning from February 2008 until May 2022. We construct a financial stress index applicable to all countries, tracking periods of financial instability in the economies, and employ shadow short rates as a proxy measure of unconventional monetary policy. This study provides strong evidence that financial stress shocks are transmitted abroad as financial stress increases in all the countries in the sample. Our results also show that financial stress innovation generates important domestic and cross-border output, inflation, and interest rate spillovers for several countries. Additionally, we identify the active role of the financial and bank credit channels in the transmission of shocks across financial systems, while macroprudential policy can intercept the propagation of the shock. Our results carry policy implications for monetary and regulatory authorities.

In this paper, we measure the interdependence of three financial stress sub-indices (banking, securities and foreign exchange) for the major advanced economies during the 1981–2009 period using a single index based on the generalized variance decompositions developed by Diebold and Yilmaz (2012). We present spillover tables and indices that demonstrate financial stress innovations to and from other indices, in addition to spillover plots that show the dynamics of stress. Furthermore, we examine the relationship between financial stability and macroeconomic fundamentals by investigating the effects of financial stress on growth and on price levels. We proxy financial stability and monetary stability with a financial stress index (FSI) and a consumer price index (CPI), respectively, and examine their interdependence. Our findings indicate that the securities markets are the main net transmitters of stress to the other markets. In addition, up to 42.8% of the forecast error variance in all the markets examined emanates from stress spillovers. Finally, our findings highlight the interrelationship of financial and monetary stability.