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Financial conditions indexes

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Author Info

  • Mayes, David

    ()
    (Bank of Finland Research)

  • Virén, Matti

    ()
    (Bank of Finland Research)

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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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0117.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 17/2001.

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Length: 35 pages
Date of creation: 19 Sep 2001
Date of revision:
Handle: RePEc:hhs:bofrdp:2001_017

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: financial conditions; asset prices; house prices; stock prices;

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Cited by:
  1. Par Osterholm, 2010. "The effect on the Swedish real economy of the financial crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 20(4), pages 265-274.
  2. Alberto Montagnoli & Oreste Napolitano, 2004. "Financial Condition Index and interest rate settings: a comparative analysis," Money Macro and Finance (MMF) Research Group Conference 2004 1, Money Macro and Finance Research Group.
  3. Andrzej Toroj, 2008. "Estimation of weights for the Monetary Conditions Index in Poland," Working Papers 27, Department of Applied Econometrics, Warsaw School of Economics.
  4. David Mayes, 2011. "The future of financial markets: financial crisis avoidance," Empirica, Springer, vol. 38(1), pages 77-101, February.
  5. 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.
  6. David G. Mayes & Matti Virén, 2004. "Asymmetries in the Euro area economy," Macroeconomics 0404024, EconWPA.
  7. Angelopoulou, Eleni & Balfoussia, Hiona & Gibson, Heather, 2013. "Building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis?," Working Paper Series 1541, European Central Bank.
  8. Junttila, Juha, 2002. "Forecasting the macroeconomy with current financial market information: Europe and the United States," Research Discussion Papers 2/2002, Bank of Finland.
  9. Mayes, David & Virén, Matti, 2009. "Changes in behaviour under EMU," Economic Modelling, Elsevier, vol. 26(4), pages 751-759, July.
  10. 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, vol. 22(2), pages 219-251, March.
  11. Stephen P Millard & Simon J Wells, 2003. "The role of asset prices in transmitting monetary and other shocks," Bank of England working papers 188, Bank of England.
  12. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department.

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