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BUILDING A FINANCIAL CONDITIONS INDEX FOR THE EURO AREA AND SELECTED EURO AREA COUNTRIES: WHAT DOES IT TELL US ABOUT THE CRISIS?

 

Eleni Angelopoulou

Bank of Greece

 

Hiona Balfoussia

Bank of Greece

 

Heather Gibson

Bank of Greece

 

Abstract

In this paper we construct Financial Conditions Indices (FCIs) for the euro area, for the period 2003 to 2011, using a wide range of prices, quantities, spreads and survey data, grounded in the theoretical literature. One FCI includes monetary policy variables, while two versions of the FCI without monetary policy are also constructed. This enables us to study the impact of monetary policy on financial conditions – indeed, overall, we find evidence of monetary policy ‘leaning against the wind’. The FCIs constructed fit in well with a narrative of financial conditions since the creation of the monetary union. FCIs for individual euro area countries are also provided, with a view to comparing financial conditions in core and periphery countries. There is evidence of significant divergence both before and during the crisis, which becomes less pronounced when monetary policy variables are included in the FCI. However, the impact of monetary policy on financial conditions appears not to be entirely symmetric across the euro area.

 

Keywords: fiscal policy, public debt, financial market, crisis, credit.

JEL classification: E61, E62, H61, H62, H63, E32.

 

Acknowledgment: We would like to thank Dafni Giannikou for excellent research assistance. Additionally, thanks are due to Stephen Hall with whom we discussed issues related to the interpretation of the principal components and to Daphne Papadopoulou for discussions on monetary policy implementation. Finally, we would like to express our gratitude to the participants of the conference Financial Crisis Models and Policy Responses, Bank of Greece and European Monetary Forum, 30-31 March 2012. The views expressed in this paper are those of the authors and not necessarily those of either the Bank of Greece or the Eurosystem.

 

Correspondence:

Heather Gibson

Economic Research Department, Bank of Greece,

21 El. Venizelos Av. 10250 Athens, Greece

Tel.:0030-210-3202415

Fax: 0030-210-3232432

Email: hgibson@bankofgreece.gr


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