US financial conditions and their link to economic activity: the role of equity valuations

06/17/2025 European Central Bank Central banks

This box explores whether the effect of tightening financial conditions on US economic growth varies depending on the level of equity valuations. Financial conditions indices (FCIs) offer a consolidated measure of the costs of financing for households, firms and governments and typically incorporate interest rates, equity prices, corporate bond spreads and exchange rates. Using an exemplary FCI, we find that equity prices significantly influence US financial conditions when equity markets are overvalued. That, however, is shown to weaken their economic growth signal.

Financial market volatility and economic policy uncertainty: bridging the gap

06/16/2025 European Central Bank Central banks

This box explores the relationship between financial market volatility and economic policy uncertainty (EPU). Historically, financial market volatility and news-based measures of EPU have displayed close co-movement, albeit diverging at times and across countries. More recently, the rise in euro area EPU has reflected an intensification of an upward trend observed over a number of years, largely driven by developments in Germany.

Determinants of inflation expectations of firms in the SAFE

06/16/2025 European Central Bank Central banks

This box explores the factors shaping the euro area inflation expectations of firms in the survey on the access to finance of enterprises (SAFE). It finds that the short-term inflation expectations of firms are more volatile and closely tied to current inflation trends compared with their medium-term and long-term expectations. The determinants of these expectations considered in the analysis include the individual characteristics of firms, the sectors these operate in, their country of operation, their anticipated business decisions and euro area inflation.

Pages

Subscribe to Front page feed