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We would like to thank Messrs. J. Decressin, P. Gerson, R. Goyal, and A. Husain for their guidance. We would also like to thank Messrs. T. Catsambas, Alternate Executive Director for Greece, J. Dagher, W. McGrew, and D. Sandri for their helpful comments and Ms. K. MacKinnon for her assistance preparing the project for publication.
Our analysis runs to the end of 2014, given the availability of data. We exclude the most recent episode of deposit and capital controls.
In addition, rising deposit rates beyond nominal inflation is also a sign of liquidity pressure.
In the case of the EA, the average deposit share of total liabilities is not as closely correlated with the total amount of liquidity provided by the ECB. Thus, we do not have the problem of interpreting essentially the same variable in two ways.
For instance, compare to Angelpoulo, et. al. In their analysis, three principal components account for 71 percent of the variance. In our case, one principal component would explain 72 percent.
The importance of property prices in FCI fluctuations emphasizes the role of collateral in lending activity, and, in general, the credit channel of monetary policy. The drop in property prices in Greece reflects, to a large extent, demand factors. However, structural factors are impeding the recovery in property prices. For instance, the number of transactions in the first half of 2014 has been virtually zero, pending changes to stamp duties (the Bank of Greece reports 7,011 appraisals for the first half of 2014, but almost none of them materialized into actual transactions).
Note that by construction, principal components summarize the leading and lagging structure of the underlying data, as well as its contemporaneous correlation structure.
This methodology does not identify the impulse response of the dependent variables to true innovations in interest rates, inflation and output, in the way that structural VARs do. However, the method is often used in the literature to remove the co-movements in the variables with the regressors. See, Hatzius, et. al (2010) for instance.