Abstract

FINANCIAL CONDITIONS AND ECONOMIC ACTIVITY: THE POTENTIAL IMPACT OF THE TARGETED LONGER-TERM REFINANCING OPERATIONS (TLTROS)

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Hiona Balfoussia

Bank of Greece

Heather D. Gibson

Bank of Greece

Abstract

This paper explores the relationship between financial conditions and real economic activity in the euro area as a whole and for Greece in particular. We use a financial conditions index (see Angelopoulou et al., 2014) which is constructed using a wide range of prices, quantities, spreads and survey data in line with theory. We update the indices and use them within a VAR framework to estimate the potential impact of the TLTROs on aspects of economic activity. Our results suggest that financial conditions do have a significant effect on economic activity and thus the TLTROs, to the extent that they are designed to improve financial conditions, will provide a boost to the real economy.

Keywords: financial conditions, monetary policy, financial crisis, credit, non-standard measures.

JEL classification: E52, E51, E61, E63, E65

Acknowledgements: The views expressed in this paper are those of the authors and not necessarily those of the Bank of Greece, the ECB or the Eurosystem.

Correspondence:

Heather D Gibson

Bank of Greece

21 E Venizelos Ave

Athens, 102 50, Greece

Tel no. +302103202415