Credit Risk Dynamics and Macroeconomic Shocks in the European Union: A Stochastic Simulation Framework for Banking Stability and Policy Analysis (2000–2025)

Abstract This study develops an integrated stochastic macro–micro framework to assess systemic risk and firm-level default dynamics across EU27 economies (2000–2025). By combining DSGE macroeconomic modeling with stochastic differential equation-based credit risk modeling , the framework captures the bidirectional feedbacks between macroeconomic shocks and financial sector vulnerabilities. Results show that macroeconomic disturbances propagate nonlinearly to firm defaults, amplified by leverage, credit networks, and contagion effects, producing tail events that traditional deterministic or linear stress tests fail to capture. Stress-test simulations, impulse response functions, and policy counterfactuals reveal that coordinated monetary, fiscal, and macroprudential interventions effectively mitigate systemic risk while supporting economic growth. Out-of-sample validation confirms the framework’s predictive accuracy, and sensitivity analyses identify key drivers of default probabilities. This integrated approach provides forward-looking early-warning indicators , a quantitative basis for stress testing, and actionable guidance for macroprudential policy in the EU27 context. JEL Classification: E32, E44, G01, C32, C53.