A1250
Title: Real-time indicator of financial fragmentation in the euro area
Authors: Roland Bouillot - Catholic University of Louvain (Belgium) [presenting]
Bertrand Candelon - Universite Catholique de Louvain (Belgium)
Iason Kynigakis - University of Kent (United Kingdom)
Abstract: Financial fragmentation in the Euro Area has become a hot topic since the European Central Bank must decide whether to maintain its fund's rates high and long enough to tame inflation or loosen its monetary policy to mitigate the risk of another European sovereign debt crisis. By using mixed-frequency high-dimensional data, the inter-country shock transmission is investigated through regularization techniques and vector autoregressive models to create a new real-time indicator of financial fragmentation. It is expected to find evidence of financial fragmentation resurgence during COVID-19 due to the pressure on public finances through the increase in sovereign debt levels and the widening of public deficits. Most importantly, the financial fragmentation risk is expected to persist and even intensify due to the ECB rate hikes amid the recent inflation burst period. Hence, monitoring this new real-time indicator tightly is an effective way to keep track of the impending financial fragmentation risk and contributes to the surveillance of the Euro Area's financial stability.
