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 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 InfoPaper provided by Banco de la Republica de Colombia in its series Temas de Estabilidad Financiera with number 055.
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Financial Conditions Index; Early-Warning Indicators; Leading Indicators; Macroprudential Supervision; Principal Component Analysis5 Classification JEL: E32; E44; E47; E51;
Other versions of this item:
- Esteban Gómez & Andrés Murcia & Nancy Zamudio, 2011. "Financial Conditions Index: Early and Leading Indicator for Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
- Pri - Economic Systems - - - - -
- Com - Mathematical and Quantitative Methods - - - - -
- Ana - General Economics and Teaching - - - - -
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