Citation:
[Journal:] Economics: The Open-Access, Open-Assessment E-Journal [ISSN:] 1864-6042 [Volume:] 11 [Issue:] 2017-6 [Publisher:] Kiel Institute for the World Economy (IfW) [Place:] Kiel [Year:] 2017 [Pages:] 1-37
Abstract:
The authors analyse 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 that 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.