Over-borrowing and financial stress has recently become an important issue in macroeconomic and policy discussions in the US as well as in the EU. In this paper the authors study two regimes of financial stress. In a regime of high financial stress, stress shocks can have large and persistent...

We analyze the feedback mechanisms between economic downturns and financial stress for several euro area countries. Our study employs newly constructed financial condition indices that incorporate banking variables extensively. We apply a non-linear Vector Smooth Transition Autoregressive...

We show that in the EU there were diverse causes for the sovereign debt crisis. Yet, fiscal austerity was hastily imposed assuming that the multiplier would be weak and fiscal consolidation could quickly be achieved. Yet, it turned out that fiscal consolidation is state dependent: It is...