A new macro-financial condition index for the euro area

A new time-domain decomposition for weakly stationary or trend stationary processes is introduced. The method is based on trigonometric polynomial modeling, and it is explicitly devised to disentangle medium to long-term and short-term fluctuations in macroeconomic and financial series. A multivariate extension involving sequential univariate decompositions and Principal Components Analysis is also provided. Based on this multivariate approach, new composite indexes of macro-financial conditions for the euro area are introduced. The indicators suggest that most of the GDP contraction during the current pandemic has been of short-term, cyclical nature. Moreover, the financial cycle might have currently achieved a peak area. Hence, the risk of further, deeper disruptions is high, particularly as a new sovereign/corporate debt crisis were not eventually avoided.