Aggregate price shocks and financial stability: the United Kingdom 1796–1999

This paper investigates aggregate price shocks on financial stability in the United Kingdom. We construct an annual index of UK financial conditions for 1790–1999 and use a dynamic probit model to estimate the effect of shocks on the index. We find evidence that price level shocks contributed significantly to financial instability during 1820–1931 and that inflation rate shocks contributed to instability during 1931–1999. While affecting the stability of the financial system, both the nature of aggregate price shocks and their impact depend on the existing monetary and financial regime.