This paper reviews the state-of-the-art of macro stress-testing
methodologies. Substantial progress has been made both in the
econometric analysis of financial soundness indicators and in the
simulation of value-at-risk measures to assess system-wide
vulnerabilities. However, a number of methodological challenges still
remain concerning the correlation of market and credit risks over
time and across institutions, the limited time horizon generally used
for the analysis and the potential instability of reduced-form
parameter estimates because of feedback effects. Further research
in this area might also focus on how to use macro stress-testing
techniques as an operational tool to incorporate financial stability
considerations into monetary policy decision-making.