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Financial Conditions Indexes

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  • Mayes, David G.

    ()
    (Business School University of Auckland)

  • Viren , Matti

    ()
    (University of Turku, Turku, and Bank of Finland Helsinki)

Abstract

This paper provides an exposition of the nature, means of estimation and uses of Financial Conditions Indexes (FCIs) and their relationship to the more common Monetary Conditions Indexes (MCIs) that are used by market analysts, international organisations and central banks. Using panel datasets for Western Europe we explore how asset prices, particularly house and stock prices, can provide useful additional indicators of future changes in output and inflation. We find a clear role for house prices but a poorly determined relationship for stock prices. Unfortunately the most useful role for FCIs comes from their incorporation of high frequency data and the opportunity this gives for extracting information about changes in market expectations for inflation and output. This helps market participants make judgements about likely central bank reactions and helps central banks assess the stance of policy between forecasts. While stock prices are high frequency, house prices are not. At quarterly frequency central banks in particular will want to use traditional economic forecasting methods and summary indicators like FCIs will have only a limited role. We illustrate how such an FCI can be used, drawing on monthly data for Finland.

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Bibliographic Info

Article provided by Camera di Commercio di Genova in its journal Economia Internazionale / International Economics.

Volume (Year): 55 (2002)
Issue (Month): 4 ()
Pages: 521-550

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Handle: RePEc:ris:ecoint:0176

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Cited by:
  1. Junttila, Juha, 2002. "Forecasting the macroeconomy with current financial market information: Europe and the United States," Research Discussion Papers, Bank of Finland 2/2002, Bank of Finland.
  2. David G. Mayes & Matti Virén, 2004. "Asymmetries in the Euro area economy," Macroeconomics, EconWPA 0404024, EconWPA.
  3. Angelopoulou, Eleni & Balfoussia, Hiona & Gibson, Heather D., 2014. "Building a financial conditions index for the euro area and selected euro area countries: What does it tell us about the crisis?," Economic Modelling, Elsevier, Elsevier, vol. 38(C), pages 392-403.
  4. Österholm, Pär, 2009. "The Effect on the Swedish Real Economy of the Financial Crisis," Working Paper, National Institute of Economic Research 110, National Institute of Economic Research.
  5. Stephen P Millard & Simon J Wells, 2003. "The role of asset prices in transmitting monetary and other shocks," Bank of England working papers, Bank of England 188, Bank of England.
  6. Alberto Montagnoli & Oreste Napolitano, 2005. "Financial Condition Index And Interest Rate Settings: A Comparative Analysis," Working Papers, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy 8_2005, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  7. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers, Netherlands Central Bank, Research Department 097, Netherlands Central Bank, Research Department.
  8. Mayes, David G. & Viren, Matti, 2005. "Monetary policy problems for currency unions: asymmetry and the problem of aggregation in the euro area," Economic Modelling, Elsevier, Elsevier, vol. 22(2), pages 219-251, March.
  9. Mayes, David & Virén, Matti, 2009. "Changes in behaviour under EMU," Economic Modelling, Elsevier, Elsevier, vol. 26(4), pages 751-759, July.
  10. Esteban Gómez & Andrés Murcia Pabón & Nancy Zamudio Gómez, . "Financial Conditions Index: Early and Leading Indicator for Colombia?," Temas de Estabilidad Financiera, Banco de la Republica de Colombia 055, Banco de la Republica de Colombia.
  11. Andrzej Toroj, 2008. "Estimation of weights for the Monetary Conditions Index in Poland," Working Papers, Department of Applied Econometrics, Warsaw School of Economics 27, Department of Applied Econometrics, Warsaw School of Economics.
  12. David Mayes, 2011. "The future of financial markets: financial crisis avoidance," Empirica, Springer, Springer, vol. 38(1), pages 77-101, February.

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