Measuring financial stability in the presence of energy shocks

The Russia–Ukraine conflict highlighted how important energy is for the surveillance of economies worldwide. Both war and economic sanctions inevitably affected energy-related commodity prices. Although shocks in energy commodities are known to have an effect on financial stability, this information is not included in existing financial stability indicators. In this paper, we first provide empirical evidence on the existing relationship between energy-related commodities and financial stability in the EU, UK and US, as well as their importance in the forecast of economic downturns. Based on this evidence, we propose a new composite indicator of financial stability which incorporates relevant information from the energy markets. The suitability of the new composite indicator is assessed by its ability to track financial, economic, and energy crises.