Non-Linear Relationship between Financial Stress and Economic Activity in Times of Heightened Uncertainty: Evidence from Emerging Economy

This study analyzes the non-linear relationship between financial stress and real economic activity in Ukraine from 2008 to 2025 using a smooth transition regression framework. The empirical results indicate asymmetric, regime-dependent responses of GDP to financial stress shocks. Using the Financial Stress Index as a transition variable, three regimes–low, intermediate, and high stress–are identified. The intermediate regime, which reflects the current environment shaped by the protracted Russian full-scale invasion, is characterized by persistent uncertainty, subdued growth and fragile equilibrium conditional on financial stress.