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Financial Conditions Indexes for Canada

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Author Info

  • Céline Gauthier
  • Christopher Graham
  • Ying Liu
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    Abstract

    The authors construct three financial conditions indexes (FCIs) for Canada based on three approaches: an IS-curve-based model, generalized impulse-response functions, and factoranalysis. Each approach is intended to address one or more criticisms of the monetary conditions index (MCI) and existing FCIs. To evaluate their three FCIs, the authors consider five performance criteria: the consistency of each FCI's weight with economic theory, its graphical ability to predict turning points in the business cycle, its dynamic correlation with output, its in-sample fit in explaining output, and its out-of-sample performance in forecasting output. Using monthly data, the authors find, in general, that housing prices, equity prices, and bond yield risk premiums, in addition to short- and long-term interest rates and the exchange rate, are significant in explaining output from 1981 to 2000. They also find that the FCIs outperform the Bank of Canada's MCI in many areas.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp04-22.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 04-22.

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    Length: 51 pages
    Date of creation: 2004
    Date of revision:
    Handle: RePEc:bca:bocawp:04-22

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    Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
    Phone: 613 782-8845
    Fax: 613 782-8874
    Web page: http://www.bank-banque-canada.ca/

    Related research

    Keywords: Monetary and financial indicators; Monetary conditions index;

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    References

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    1. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
    2. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    3. Barry Cozier & Greg Tkacz, . "The Term Structure and Real Activity in Canada," Working Papers 94-3, Bank of Canada.
    4. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
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    Cited by:
    1. Abdul Majid, Muhamed Zulkhibri, 2010. "Measuring Monetary Conditions in A Small Open Economy: The Case of Malaysia," MPRA Paper 29041, University Library of Munich, Germany.
    2. Céline Gauthier & Fu Chun Li, 2006. "Linking Real Activity and Financial Markets: The Bonds, Equity, and Money (BEAM) Model," Working Papers 06-42, Bank of Canada.
    3. Eleni Angelopoulou & Hiona Balfoussia & Heather D. Gibson, 2012. "Building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis?," Working Papers 147, Bank of Greece.
    4. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department.
    5. Greg Tkacz & Carolyn Wilkins, 2006. "Linear and Threshold Forecasts of Output and Inflation with Stock and Housing Prices," Working Papers 06-25, Bank of Canada.

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