Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications

IMF Working Papers, September 29, 2023

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Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications

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Bibliographic details

• Authors: Giovanni Borraccia, Raphael A Espinoza, Vincenzo Guzzo, Romain Lafarguette, Fuda Jiang, Vina Nguyen, Miguel A. Segoviano, Philippe Wingender
• Published: September 29, 2023
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9798400254789.001

Methodology

• Develops a new measure of financial conditions (FCs) that targets the growth of financial liabilities using the partial least square methodology.
• Estimates financial condition indexes (FCIs) across European economies at both the aggregate and sectoral levels.
• Decomposes changes in FCs into several factors: credit availability and costs, price of risk, policy stance, and funding constraints.
• Assesses macroeconomic effects using the inverse probability weighting method over the sample period from 2000 to 2023.

Key findings

• Financial conditions loosened during the pandemic thanks to policy support but started to tighten significantly since mid-2021.
• The study provides FCIs across European economies and for sectors, based on the liability-growth-targeted FCs measure.

Quantitative macroeconomic impacts (three-year horizon)

• A shift from a neutral to a tight FCI regime (such as the ongoing episode for most European countries) will on average:
  • Lower output by 2.2 percent.
  • Lower inflation by 0.7 percentage points.
  • Increase unemployment by 0.3 percentage points.

Drivers and decomposition

• Changes in financial conditions are decomposed into:
  • Credit availability and costs
  • Price of risk
  • Policy stance
  • Funding constraints

Publication and data notes

• Authors: Giovanni Borraccia, Raphael A Espinoza, Vincenzo Guzzo, Romain Lafarguette, Fuda Jiang, Vina Nguyen, Miguel A. Segoviano, Philippe Wingender
• Date: September 29, 2023
• Series: Working Paper No. 2023/209
• Pages: 58
• Issue: 209
• DOI: https://doi.org/10.5089/9798400254789.001
• ISBN: 9798400254789
• ISSN: 1018-5941
• Data link: Link to data for this title (ZIP) provided on the publication page

IMF Working Paper: "Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications", Working Paper No. 2023/209

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