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A New Cluster-Based Financial Vulnerability Indicator and Its Application to Household Stress Testing in Croatia

This paper proposes a new approach to household financial vulnerability analysis by employing cluster technique in the identification of potentially vulnerable households. The cluster-based vulnerability indicator is applied to stress testing with the specific aim of assessing the extent to which the prolonged economic downturn following the Great Recession of 2008-2009 hurt indebted households in Croatia. The paper compares the results based on the new approach with those based on traditional methods. Interest rate shocks had a stronger impact on household vulnerability in the traditional approach, whereas decrease in employment is found to be more disruptive in the cluster-based approach.

household financial vulnerability; cluster analysis; stress testing; Croatia

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