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US financial conditions and their link to economic activity: the role of equity valuations

Author

Listed:
  • Klass, Cajsa
  • Manu, Ana-Simona

Abstract

This box explores whether the effect of tightening financial conditions on US economic growth varies depending on the level of equity valuations. Financial conditions indices (FCIs) offer a consolidated measure of the costs of financing for households, firms and governments and typically incorporate interest rates, equity prices, corporate bond spreads and exchange rates. Using an exemplary FCI, we find that equity prices significantly influence US financial conditions when equity markets are overvalued. That, however, is shown to weaken their economic growth signal. This finding suggests that policymakers and analysts should remain attentive to the role of individual FCI components, especially during periods of atypical valuations. JEL Classification: G12, G15, E44

Suggested Citation

  • Klass, Cajsa & Manu, Ana-Simona, 2025. "US financial conditions and their link to economic activity: the role of equity valuations," Economic Bulletin Boxes, European Central Bank, vol. 4.
    • Handle: RePEc:ecb:ecbbox:2025:0004:1
    Note: 2663204
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    More about this item

    Keywords

    market overvaluation; stock prices; US financial conditions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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