Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154077
Authors: 
Darracq Pariès, Matthieu
Maurin, Laurent
Moccero, Diego
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper 1644
Abstract: 
We implement a two-step approach to construct a financing conditions index (FCI) for the euro area and its four larger member states (Germany, France, Italy and Spain). The method, which follows Hatzius et al. (2010), is based on factor analysis and enables to summarise information on financing conditions from a large set of financial indicators, controlling for the level of policy interest rates, changes in output and inflation. We find that the FCI tracks successfully both worldwide and euro area specific financial events. Moreover, while the national FCIs are constructed independently, they display a similar pattern across the larger euro area economies over most of the sample period and varied more widely since the start of the sovereign debt crisis in 2010. Focusing on the euro area, we then incorporate the FCI in a VAR model comprising output, inflation, the monetary policy rate, bank loans and bank lending spreads. The credit supply shock extracted with sign restrictions is 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. We also find that adding the FCI to the VAR enables an earlier detection of credit supply shocks.
Subjects: 
credit supply shocks
euro area
factor models
financial conditions index
large dataset
sign restrictions
structural VAR
JEL: 
E17
E44
E50
Document Type: 
Working Paper

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