STRUCTURAL DIFFERENCES IN THE EUROZONE: MEASURING FINANCIAL STABILITY BY FCI

In this paper, we apply two novel methodological approaches, Tucker three-way principal component analysis and locally weighted principal component analysis, to construct financial conditions index for Eurozone countries. The aim is to point out how real and financial macroeconomic variables affect...

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Bibliographic Details
Published inMacroeconomic dynamics Vol. 24; no. 1; pp. 69 - 92
Main Authors Foglia, Matteo, Cartone, Alfredo, Fiorelli, Cristiana
Format Journal Article
LanguageEnglish
Published Cambridge Cambridge University Press 01.01.2020
Subjects
Economic theory
European Monetary Union
Eurozone
Macroeconomics
Principal components analysis
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Summary:In this paper, we apply two novel methodological approaches, Tucker three-way principal component analysis and locally weighted principal component analysis, to construct financial conditions index for Eurozone countries. The aim is to point out how real and financial macroeconomic variables affect the credit channel and which variables are more relevant in each occasion, highlighting structural differences within the Eurozone. The results suggest that the Eurozone is involved into a low easing pattern, which is difficult to reverse and affects considerably the financial conditions, surrounding the hypothesis that this pattern has been worsened by structural differences between the European Monetary Union (EMU) countries. Empirical evidence shows that European Central Bank (ECB) policy has managed to cool financial tensions and has made financial conditions homogeneous, but it has not been able to restore them at a precrisis level.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100518000329