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


  • Diego Nicolas Moccero
  • Matthieu Darracq Pariès
  • Laurent Maurin


type="main" xml:lang="en"> The international financial crisis and the euro-area sovereign debt crisis brought to the fore the importance of financial conditions to the macro-economy. 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-area-specific 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.

Suggested Citation

  • Diego Nicolas Moccero & Matthieu Darracq Pariès & Laurent Maurin, 2014. "Financial Conditions Index and Identification of Credit Supply Shocks for the Euro Area," International Finance, Wiley Blackwell, vol. 17(3), pages 297-321, December.
  • Handle: RePEc:bla:intfin:v:17:y:2014:i:3:p:297-321

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    Cited by:

    1. Marko Melolinna & Máté Tóth, 2019. "Output gaps, inflation and financial cycles in the UK," Empirical Economics, Springer, vol. 56(3), pages 1039-1070, March.
    2. Doerr, Sebastian & Raissi, Mehdi & Weber, Anke, 2018. "Credit-supply shocks and firm productivity in Italy," Journal of International Money and Finance, Elsevier, vol. 87(C), pages 155-171.
    3. Kanngiesser, Derrick & Martin, Reiner & Maurin, Laurent & Moccero, Diego, 2017. "Estimating the impact of shocks to bank capital in the euro area," Working Paper Series 2077, European Central Bank.
    4. Laurent Maurin, 2019. "Weakness of investment in Portugal: what role do credit supply and fiscal consolidation shocks play?," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 18(1), pages 19-45, February.
    5. Benchimol, Jonathan, 2016. "Money and monetary policy in Israel during the last decade," Journal of Policy Modeling, Elsevier, vol. 38(1), pages 103-124.
    6. Lhuissier, Stéphane, 2017. "Financial intermediaries’ instability and euro area macroeconomic dynamics," European Economic Review, Elsevier, vol. 98(C), pages 49-72.
    7. Borg Ian & Micallef Brian, 2018. "Constructing a Financial Condition Index for a Small-Open Economy: The Case of Malta," Research in Applied Economics, Macrothink Institute, vol. 10(3), pages 89-105, September.
    8. Ernest Gnan & Maria Teresa Valderrama & Walter Waschiczek, 2019. "Financing conditions in Austria since the introduction of the euro," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1-Q2/19, pages 57-70.
    9. Pana Alves & Daniel Dejuán & Laurent Maurin, 2019. "Can survey-based information help assess investment gaps in the eu?," Occasional Papers 1908, Banco de España;Occasional Papers Homepage.
    10. Iñaki Aldasoro & Robert Unger, 2017. "External financing and economic activity in the euro area - why are bank loans special?," BIS Working Papers 622, Bank for International Settlements.
    11. Kapetanios, George & Price, Simon & Young, Garry, 2018. "A UK financial conditions index using targeted data reduction: Forecasting and structural identification," Econometrics and Statistics, Elsevier, vol. 7(C), pages 1-17.
    12. Christiaan Pattipeilohy & Christina Bräuning & Jan Willem van den End & Renske Maas, 2017. "Assessing the effective stance of monetary policy: A factor-based approach," DNB Working Papers 575, Netherlands Central Bank, Research Department.
    13. Alves, Pana & Dejuan, Daniel & Maurin, Laurent, 2019. "Can survey-based information help to assess investment gaps in the EU?," EIB Working Papers 2019/04, European Investment Bank (EIB).
    14. Bijsterbosch, Martin & Falagiarda, Matteo, 2015. "The macroeconomic impact of financial fragmentation in the euro area: Which role for credit supply?," Journal of International Money and Finance, Elsevier, vol. 54(C), pages 93-115.
    15. Mandler, Martin & Scharnagl, Michael, 2019. "Bank loan supply shocks and alternative financing of non-financial corporations in the euro area," Discussion Papers 23/2019, Deutsche Bundesbank.
    16. Bańbura, Marta & Albani, Maria & Ambrocio, Gene & Bursian, Dirk & Buss, Ginters & de Winter, Jasper & Gavura, Miroslav & Giordano, Claire & Júlio, Paulo & Le Roux, Julien & Lozej, Matija & Malthe-Thag, 2018. "Business investment in EU countries," Occasional Paper Series 215, European Central Bank.

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