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Financial conditions and economic activity: a statistical approach


  • Magdalena Erdem
  • Kostas Tsatsaronis


How do conditions in the financial sector affect the macroeconomy? We summarise the common variation in a large array of financial variables into a small set of statistical factors and examine the information content of these factors when forecasting GDP and inflation in four economies. We find that financial factors contain information that is independent of and complementary to that in real variables. This information accounts for a larger proportion of the movement in real and nominal GDP, but a smaller proportion of the variability of inflation.

Suggested Citation

  • Magdalena Erdem & Kostas Tsatsaronis, 2013. "Financial conditions and economic activity: a statistical approach," BIS Quarterly Review, Bank for International Settlements, March.
  • Handle: RePEc:bis:bisqtr:1303f

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    References listed on IDEAS

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    1. repec:tpr:asiaec:v:16:y:2017:i:2:p:83-117 is not listed on IDEAS
    2. Nicoletti, Giulio & Wacker, Konstantin M. & Lodge, David, 2014. "Measuring financial conditions in major non-euro area economies," Working Paper Series 1743, European Central Bank.
    3. Simone Auer, 2017. "A Financial Conditions Index for the CEE economies," Temi di discussione (Economic working papers) 1145, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods


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