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STRUCTURAL DIFFERENCES IN THE EUROZONE: MEASURING FINANCIAL STABILITY BY FCI

Published online by Cambridge University Press:  07 June 2018

Matteo Foglia,
Alfredo Cartone and
Cristiana Fiorelli
Matteo Foglia*
Affiliation:
“G.d’Annunzio” University of Chieti-Pescara
Alfredo Cartone
Affiliation:
“G.d’Annunzio” University of Chieti-Pescara
Cristiana Fiorelli
Affiliation:
University of Teramo
*
Address correspondence to: Matteo Foglia, Department of Economics, “G.d’Annunzio” University of Pescara, Viale Pindaro 42, Pescara, Italy; e-mail: matteo.foglia@unich.it.
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Abstract

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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.

Keywords

FCIEurozone CrisisThree-WayLWPCA

Footnotes

We would like to thank Roberto Benedetti, Eliana Angelini, and Valentina Meliciani for helpful comments on an earlier draft of the paper. Furthermore, we wish to thank participants of the 8th International Conference “Economics, Economics Policies and Sustainable Growth in the Wake of the Crisis,” University of Ancona, September 8–10 (2016), for very helpful suggestions. None of them are responsible for any errors in this paper.

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