Financial Stability in Emerging Market Economies

The paper attempts to establish the financial instability index. Representative variables are Real Effective Exchange Rate, Interest rate, Foreign Reserves, and relative Stock market index. These factors are found to be significant in fostering Periods of stress and vice versa in the Member States of BRICS. The Principal Components Analysis Technique is used to extract the Variation across the variables, while for the estimation, a dynamic Probit model is applied to identify the average duration and change in instability index across the sample countries. The proposed econometrical framework successfully identified the qualified episodes of instability in selected countries, that are fairly consistent with the real crisis. Policymakers utilized the framework of this paper to identify the early signaling for financial stress and respond with macroeconomic prudential policies to mitigate the severity of occurring events.