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Building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis?

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Author Info

  • Eleni Angelopoulou

    ()
    (Bank of Greece)

  • Hiona Balfoussia

    ()
    (Bank of Greece)

  • Heather D. Gibson

    ()
    (Bank of Greece)

Abstract

In this paper we construct Financial Conditions Indices (FCIs) for the euro area, for the period 2003 to 2011, using a wide range of prices, quantities, spreads and survey data, grounded in the theoretical literature. One FCI includes monetary policy variables, while two versions of the FCI without monetary policy are also constructed. This enables us to study the impact of monetary policy on financial conditions – indeed, overall, we find evidence of monetary policy ‘leaning against the wind’. The FCIs constructed fit in well with a narrative of financial conditions since the creation of the monetary union. FCIs for individual euro area countries are also provided, with a view to comparing financial conditions in core and periphery countries. There is evidence of significant divergence both before and during the crisis, which becomes less pronounced when monetary policy variables are included in the FCI. However, the impact of monetary policy on financial conditions appears not to be entirely symmetric across the euro area.

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Bibliographic Info

Paper provided by Bank of Greece in its series Working Papers with number 147.

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Length: 44 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:bog:wpaper:147

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Web page: http://www.bankofgreece.gr
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Keywords: fiscal policy; public debt; financial market; crisis; credit;

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  1. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
  2. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  3. Troy Matheson, 2011. "Financial Conditions Indexes for the United States and Euro Area," IMF Working Papers 11/93, International Monetary Fund.
  4. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
  5. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  6. Andrew Swiston, 2008. "A U.S. Financial Conditions Index: Putting Credit Where Credit is Due," IMF Working Papers 08/161, International Monetary Fund.
  7. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  8. Marie Diron & Maria Cruz Manzano & Thomas Westermann, 2005. "Forecasting aggregate investment in the euro area: do indicators of financial conditions help?," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 206-27 Bank for International Settlements.
  9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  10. Mark A. Carlson & Kurt F. Lewis & William R. Nelson, 2012. "Using policy intervention to identify financial stress," Finance and Economics Discussion Series 2012-02, Board of Governors of the Federal Reserve System (U.S.).
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