Financial Conditions Index and Identification of Credit Supply Shocks for the Euro Area

Abstract

The international financial crisis and the euro-area sovereign debt crisis brought to the fore the importance of financial conditions to the macroeconomy. The complexity of the financial sector means that a wide range of financial variables is needed to fully characterize its functioning in real time. In this paper we construct a financial conditions index (FCI) for the euro area following the studies by Hatzius et al. and Brave and Butters. Our FCI successfully tracks both worldwide and euro-areaspecific financial events. We then incorporate the FCI into a VAR model comprising output, inflation, the monetary policy rate, bank loans and bank lending spreads to identify credit supply shocks with sign restrictions. These shocks are estimated to have caused around one-fifth of the decline in euro-area manufacturing production at the trough of the financial crisis and a rise in bank lending spreads of around 30 basis points.14 Our results are similar to those of Angelopoulou et al. (2013). 15 Unlike the other two indicators, our FCI encompasses a large range of financial series. For more details, see ECB (2012).

Carbon emissions and the cost of debt in the eurozone: The role of public policies, climate‐related disclosure and corporate governance

“…To control for monetary policy, we include the yearly average of the 6‐month Euribor. In fact, the cost of debt adjusts in line with the Euribor interest rate variation (Arce, Mayordomo, & Peña, 2013; Goss & Roberts, 2011; Moccero, Pariès, & Maurin, 2014).…”

Loan Supply Shocks and the Business Cycle

“…Moccero et al. () estimate a structural VAR for the euro area with monthly data from 2003 to 2013, including data for bank loans to non‐financial corporations and a spread between a composite cost of bank lending to non‐financial corporations and the 3‐month Euribor (as well as a financial conditions index in some specifications). Identifying credit supply shocks with sign restrictions, they find that these shocks had a significant impact on manufacturing production, lending spreads and bank loans during the most recent crisis.…”

“…The identification of loan supply shocks we adopt is based on sign restrictions. The latter have been applied before to identify these shocks (see, for example, Hristov et al , ; Barnett and Thomas, ; Moccero et al , ; Eickmeier and Ng, ; Mumtaz et al , ), but the way they have been specified has in most cases limitations that we try to overcome, as we will argue below. Moreover, our paper is the first to provide a systematic comparison of the relevance of loan supply shocks across the euro area, the UK and the USA.…”

Constructing a Financial Condition Index for a Small-Open Economy: The Case of Malta

“…After bottoming out in 2009, the recovery in euro area financial conditions was very volatile and muted. Fiscal concerns in 2011 and the intensification of the sovereign debt crisis in 2012 continued to create a tight financial environment, alleviated somewhat by non-standard measures (Darracq Pariè s et al, 2014). Other studies document that the euro area experienced a prolonged period of tight financial conditions in the aftermath of the financial crisis, easing only by the end of 2014 (Manning and Shamloo, 2015).…”