Financial channels and economic activity in the euro area

This section discusses the nexus between financial and macroeconomic developments in the euro area. It draws on key lessons from the literature and provides stylised facts on the main transmission channels through which financial developments have affected real economic activity since the crisis. Macro-financial linkages are investigated from an empirical perspective for the euro area as a whole by looking at four key channels: i) the interest rate channel; ii) the borrower balance sheet channel; iii) the bank balance sheet channel; and iv) the uncertainty channel. Overall, the results suggest that financial variables have significant impact on macroeconomic developments but also that the transmission seems to have changed since the crisis. Notably, the interest rate channel has helped the modest recovery since 2014 by supporting both private and public consumption. The positive boost given to favourable financing conditions in 2015 has been somewhat compensating the adverse effects of the borrower balance sheet channel. The bank balance sheet channel and the uncertainty channel play a particularly important role in capturing the weakness in the current rebound in investment