Financial stress in the Brazilian economy during an inflation targeting regime

Abstract Financial crises that have occurred in recent decades brought new challenges for policymakers in developed and developing countries in order to include issues related to financial stability. This paper aimed to build a Financial Stress Index (FSI) to identify and characterize episodes of financial stress that affected the Brazilian economy during an inflation targeting regime. Five episodes of stress with a duration of greater or equal to three months were identified. Four of them were associated with crises that impacted the Brazilian economy: the economic confidence crisis (2002); crisis of subprime (2008); crisis in the euro zone (2011) and the political and economic crisis (2014). The instability in the foreign exchange and stock market enhanced the impact of major episodes of financial stresses on the Brazilian economy. Results showed that the F.S.I. can be a useful tool for the Brazilian Central Bank to identify such episodes which generate financial stress in the economy.