The Impacts of Energy Price Shocks on Financial Stability

Abstract

Stability of financial system has become very important not only for practitioners and policy makers but also for researchers, since lack of it can trigger to turmoil and bursts in global financial system. Besides, hazardous effects of financial instability states can quickly spread out globally thanks to financial connectedness and the last global financial crisis sets an example of this. Hence, there exist increasing number of studies in the literature which determine early warning indicators of financial instability states in order to avoid from their catastrophic effects into economy. In the light of this, empirical studies in the related literature constructed financial stress indexes in low frequency (weekly, monthly, quarterly or annually) or in high frequency (daily) in order to measure risks and fragilities of financial system. On the other hand, energy price shocks have detrimental effects into economies by different transmission channels due to energy dependency of emerging and developed countries. 1973 and 1979 oil price shocks set example of these effects since they harmfully affected both developed and emerging economies. Along with that, since oil usage consist of the greatest amount in total energy consumption, researchers investigated the impacts of oil price shocks on macro economies or financial systems of countries. In this study; in the first step, we identify systemic stress of financial systems of 9 countries (G-7, Norway and Turkey) with high frequency (daily) financial stress indexes which consists of daily financial market indicators. Graphical illustrations of financial stress indexes show that all indexes response effectively to well-known financial stress events. In the second step, the impacts of oil price shocks on financial stability are discussed for 9 net oil importer/exporter countries with an application of SVAR model. Finally, similarities/dissimilarities of impacts of oil price shocks on 9 net oil importer/exporter countries’ financial stabilities are analyzed.