The Relationship between Macroeconomic Overheating and Financial Vulnerability: A Narrative Investigation Accessible Data
Figure 1: Economic overheating, Selected Financial Disturbances, and the Aggregate Financial Vulnerability Index
This figure provides a timeline of several financial disturbances between 1960 and 2018. The selected disturbances are: the Credit Crunch of 1966, Credit Crunch of 1970, the Banking Crisis of 1974, the Black Monday in 1987, the S&L Crisis in the mid to late 1980s, the Junk Bond Market Crash in 1989, the Dot-Com Crash in 2000, and the Financial Crisis in 2007-09. The last two disturbances are in bold to highlight that these two episodes have the strongest linkages to macroeconomic overheating from a historical reading of the evidence. in addition, the figure, includes (1) 6 shaded time regions that correspond to periods of macroeconomic overheating, and (2) a time series plot of the aggregate vulnerability index computed using the methodology in Aikman et al. (2015). Data for this index, with values between 0 and 1, are available since 1993 and show an increasing trend to reach levels close to 1 until 2008, a rapid strong decline to levels close to 0 until 2011 and a slow recovery to values around 0.4 in 2018.
Note: Disturbances with stronger linkages to overheating are highlighted in bold. The Aggregate Financial Vulnerability Index, available since 1993, is computed using the methodology in Aikman et al. (2015).