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

_IMF Working Papers, September 29, 2023_

## Source details

**Canonical URL:** [Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications](https://www.imf.org/en/publications/wp/issues/2023/09/29/financial-conditions-in-europe-dynamics-drivers-and-macroeconomic-implications-539653)

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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

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### 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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_Source: https://www.imf.org/en/publications/wp/issues/2023/09/29/financial-conditions-in-europe-dynamics-drivers-and-macroeconomic-implications-539653_