Abstract

The authors analyze 149 newly compiled monthly time series on financial market stress conditions in the euro area. With the aid of a factor model they find different sources of financial stress which are important for selecting and preparing the appropriate policy response. The existence of a "Periphery Banking Crisis" factor, a "Stress" factor and a "Yield Curve" factor seems to explain the bulk of volatility in recent euro area financial sector data. Moreover, by a real-time forecasting exercise, the authors show that including additional factors—that reflect financial sector conditions—improves forecasts of economic activity at short horizons.

JEL Classification:

C38, G01

Cite As

[Please cite the corresponding journal article] Marcus Kappler and Frauke Schleer (2016). A Financially Stressed Euro Area. Economics Discussion Papers, No 2016-22, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-22

Comments and Questions

Anonymous - Referee Report 1

June 07, 2016 - 09:15

see attached file

[ Download attached file ]

Anonymous - Response to Referee Report 1

June 22, 2016 - 12:22

Thank you very much for reading our paper so thoroughly and for acknowledging that our stress indices are a useful additional statistic for policymakers and research institutions. We appreciate your recommendations to include more variables such as finanancialized goods. However, we already dealt with a thoroughly and lavishly compiled data set comprising more dimensions of financial stress that are usually analysed. An inclusion of additional variables is far beyond the scope of the present paper. As regards the isolation of foreign from domestic stress influences we also very much appreciate the recommendation but leave this to future work on European financial stress indices.

Anonymous - Referee Report 2

July 19, 2016 - 11:43