NEW EVIDENCE ON THE IMPACT OF FINANCIAL CRISES IN ADVANCED COUNTRIES APPENDIX A Derivation of the New Measure of Financial Distress

This appendix describes how we derive our new semiannual measure of financial distress for a sample of advanced economies for the period 1967 to 2007. As discussed in the paper, our approach follows others in the literature in relying on qualitative evidence about financial conditions in each country. A key feature of our approach is the use of a consistent real-time source of this information. The use of contemporaneous accounts should help us avoid the possibility of bias from the retrospective identification of financial crises. The use of a single source that covers many countries over a long period of time helps ensure consistency in the analysis across countries and episodes. A second important feature of our measure is that we do not treat financial crises as a 0-1 variable, or divide crises into just two groups, such as minor and major or nonsystemic and systemic. Both logic and descriptions of actual episodes of financial distress suggest that financial-market problems come much closer to falling along a continuum than to being discrete events that are all of similar severities, or that fall into just a few categories. We therefore classify financial distress on a scale of 0 to 15.