Financial Conditions Index: Early and Leading Indicator for Colombia
AbstractThis paper is an attempt at constructing a simple and effective macroprudential tool for policymakers. By integrating the joint occurrences of the main financial markets in Colombia into a single Financial Conditions Index (FCI), we hope to synthesize the information embedded in them regarding possible future economic outcomes. To do this, we use monthly data on 21 variables for the period comprised between July, 1991 - June, 2010 and apply Principal Component Analysis (PCA) on their correlation matrix. On the one hand, we evaluate the predictive capacity of the FCI in forecasting GDP growth at different time horizons and find that it performs better as a leading indicator of real activity than other individual financial variables and an autoregressive model of GDP growth. Additionally, we are interested in testing the FCI’s long-term capability to correctly anticipate periods of distress in the economy, and find that the index could be used as an effective early-warning indicator. Hence, our FCI seems to represent a useful instrument for both financial stability and macroprudential supervision purposes.
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Bibliographic InfoArticle provided by BANCO DE LA REPÚBLICA - ESPE in its journal ENSAYOS SOBRE POLÍTICA ECONÓMICA.
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- Esteban Gómez & Andrés Murcia Pabón & Nancy Zamudio Gómez, . "Financial Conditions Index: Early and Leading Indicator for Colombia?," Temas de Estabilidad Financiera 055, Banco de la Republica de Colombia.
- Pri - Economic Systems - - - - -
- Com - Mathematical and Quantitative Methods - - - - -
- Ana - General Economics and Teaching - - - - -
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