We may not have a high degree of success at predicting precisely when a financial crisis will occur or exactly how big it will be, but what we can and should do, says Éric Tymoigne, is develop effective ways of detecting and measuring the growth of financial fragility in a system. “[S]ignificant economic and financial crises do not just happen,” he writes, “there is a long process during which the economic and financial system becomes more fragile.”
One of the purposes of the Financial Stability Oversight Council (FSOC) that was created by Dodd-Frank is to provide regulators with an early warning system regarding threats to financial stability. In light of this, Tymoigne provides his latest contribution to the construction of a measure of systemic risk and identifies specific areas in which we need better data. With the aid of Hyman Minsky’s theoretical framework, Tymoigne has developed an index of financial fragility for housing finance in the US, the UK, and France. The point is not to attempt to predict when a shock to the system is likely to occur, but to measure the degree to which such a shock would be amplified through a debt deflation.Read it at Multiplier Effect
How to Measure Financial Fragility
by Michael Stephens
Links to Éric Tymoigne's latest working paper.