IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2023-209.html
   My bibliography  Save this paper

Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications

Author

Listed:
  • Giovanni Borraccia
  • Mr. Raphael A Espinoza
  • Vincenzo Guzzo
  • Romain Lafarguette
  • Fuda Jiang
  • Vina Nguyen
  • Miguel A. Segoviano
  • Mr. Philippe Wingender

Abstract

We develop a new measure of financial conditions (FCs) that targets the growth of financial liabilities using the partial least square methodology. We then estimate financial condition indexes (FCIs) across European economies, both at the aggregate and sectoral levels. We decompose the changes in FCs into several factors including credit availability and costs, price of risk, policy stance, and funding constraints. Our results show that FCs loosened during the pandemic thanks to policy support but started to tighten significantly since mid-2021. Using the inverse probability weighting method over the sample period from 2000 to 2023, we find that a shift from a neutral to a tight FCI regime such as the ongoing episode for most European countries will on average lower output and inflation by 2.2 percent and 0.7 percentage points respectively and increase unemployment by 0.3 percentage points over a three-year horizon.

Suggested Citation

  • Giovanni Borraccia & Mr. Raphael A Espinoza & Vincenzo Guzzo & Romain Lafarguette & Fuda Jiang & Vina Nguyen & Miguel A. Segoviano & Mr. Philippe Wingender, 2023. "Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications," IMF Working Papers 2023/209, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/209
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=539653
    Download Restriction: no
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2023/209. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.