Economic and financial stability under uncertainty in the U.S.: insights from Fourier analysis

In the aftermath of the 2008 Global Financial Crisis, the occurrence of financial turmoil even in developed economies has sparked renewed debates on financial stability and caused the rise of the relevance of the variables employed to represent financial stability, which has gained increasing importance in the literature. This study investigates the impact of economic stability and uncertainty on financial stability in the United States over the period 1970 to 2022. Financial stability is proxied by the index developed by Owoundi, Mbassi, and Owoundi (2021), while economic stability is captured through the International Country Risk Guide (ICRG 2014) index. The relationship among the variables is examined using the Fourier methodology. The empirical findings reveal that economic stability exerts a positive influence on financial stability, whereas economic uncertainty negatively affects financial stability only in the long run. The causality analysis further indicates a unidirectional causal flow from economic stability and economic uncertainty to financial stability, in line with the coefficient estimates. Additionally, the results demonstrate bidirectional linkages between financial stability and economic stability.