Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications
Author:
Giovanni Borraccia
Search for other papers by Giovanni Borraccia in
Current site
Google Scholar
Close
,
Raphael A Espinoza
Search for other papers by Raphael A Espinoza in
Current site
Google Scholar
Close
,
Vincenzo Guzzo
Search for other papers by Vincenzo Guzzo in
Current site
Google Scholar
Close
,
Romain Lafarguette
Search for other papers by Romain Lafarguette in
Current site
Google Scholar
Close
,
Fuda Jiang
Search for other papers by Fuda Jiang in
Current site
Google Scholar
Close
,
Vina Nguyen https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Vina Nguyen in
Current site
Google Scholar
Close
,
Miguel A. Segoviano
Search for other papers by Miguel A. Segoviano in
Current site
Google Scholar
Close
, and
Philippe Wingender
Search for other papers by Philippe Wingender in
Current site
Google Scholar
Close
We develop a new measure of financial conditions (FCs) that targets the growth of financial liabilities using the partial least square methodology. We then estimate financial condition indexes (FCIs) across European economies, both at the aggregate and sectoral levels. We decompose the changes in FCs into several factors including credit availability and costs, price of risk, policy stance, and funding constraints. Our results show that FCs loosened during the pandemic thanks to policy support but started to tighten significantly since mid-2021. Using the inverse probability weighting method over the sample period from 2000 to 2023, we find that a shift from a neutral to a tight FCI regime such as the ongoing episode for most European countries will on average lower output and inflation by 2.2 percent and 0.7 percentage points respectively and increase unemployment by 0.3 percentage points over a three-year horizon.
  • Collapse
  • Expand
IMF Working Papers