A Thermometer for Financial Instability in the Euro Area Economy and the Role of Carry Trade
23 Pages Posted: 16 Sep 2014
Date Written: September 15, 2014
Abstract
The paper suggests a simple financial instability indicator for the euro area economy. It works as a discrete thermometer with three possible outcomes depending on the severity of the crisis. This indicator is based on the specific shape of the credit term structure for the two main peripheral countries in the area. The paper discusses how some key features of term structure are linked to government debt carry trade. In order to assess the performance of the proposed market-based indicator, the paper shows how the identified episodes of financial turmoil are related with the timing and the intensity of unconventional measures in the euro area.
Keywords: Financial stress index, Unconventional measures, Asset Swap, EONIA, Term structure of credit spread, Peripheral euro government bonds, Time to Structural Change, Macroprudential policy
JEL Classification: C51, E58, E65, G15, G18, H81
Suggested Citation: Suggested Citation