IDEAS home Printed from https://ideas.repec.org/p/bca/bocawp/04-22.html
   My bibliography  Save this paper

Financial Conditions Indexes for Canada

Author

Listed:
  • Céline Gauthier
  • Christopher Graham
  • Ying Liu

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.

Suggested Citation

  • Céline Gauthier & Christopher Graham & Ying Liu, 2004. "Financial Conditions Indexes for Canada," Staff Working Papers 04-22, Bank of Canada.
  • Handle: RePEc:bca:bocawp:04-22
    DOI: 10.34989/swp-2004-22
    as

    Download full text from publisher

    File URL: https://doi.org/10.34989/swp-2004-22
    File Function: Abstract
    Download Restriction: no

    File URL: https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp04-22.pdf
    File Function: Full text
    Download Restriction: no

    File URL: https://libkey.io/10.34989/swp-2004-22?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156, National Bureau of Economic Research, Inc.
    2. Donald W. K. Andrews, 2003. "Tests for Parameter Instability and Structural Change with Unknown Change Point: A Corrigendum," Econometrica, Econometric Society, vol. 71(1), pages 395-397, January.
    3. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    4. Barry Cozier & Greg Tkacz, "undated". "The Term Structure and Real Activity in Canada," Staff Working Papers 94-3, Bank of Canada.
    5. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    6. 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.
    7. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
    2. Charles Goodhart & Boris Hofmann, 2005. "The IS curve and the transmission of monetary policy: is there a puzzle?," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 29-36.
    3. Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, 2010. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," Working Papers 2011_22, Business School - Economics, University of Glasgow, revised Apr 2011.
    4. Syed Kanwar Abbas, 2018. "Global slack hypothesis: evidence from China, India and Pakistan," Empirical Economics, Springer, vol. 54(2), pages 593-627, March.
    5. Campa, Jose Manuel & Gonzalez Minguez, Jose M., 2006. "Differences in exchange rate pass-through in the euro area," European Economic Review, Elsevier, vol. 50(1), pages 121-145, January.
    6. Boivin, Jean, 2006. "Has U.S. Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1149-1173, August.
    7. Meenagh, David & Minford, Patrick & Nowell, Eric & Sofat, Prakriti & Srinivasan, Naveen, 2009. "Can the facts of UK inflation persistence be explained by nominal rigidity?," Economic Modelling, Elsevier, vol. 26(5), pages 978-992, September.
    8. David Meenagh & Patrick Minford & Eric Nowell & Prakriti Sofat & Naveen Srinivasan, 2007. "Are the facts of UK inflation persistence to be explained by nominal rigidity or changes in monetary regime?," WEF Working Papers 0028, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
    9. Campa, Jose M. & Goldberg, Linda S., 2002. "Exchange rate pass-through into import prices: A macro or micro phenomenon?," IESE Research Papers D/475, IESE Business School.
    10. Antonio Paradiso & Saten Kumar & B. Bhaskara Rao, 2013. "A New Keynesian IS curve for Australia: is it forward looking or backward looking?," Applied Economics, Taylor & Francis Journals, vol. 45(26), pages 3691-3700, September.
    11. Lange, Ronald H., 2015. "International long-term yields and monetary policy in a small open economy: The case of Canada," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 292-310.
    12. Jean Boivin & Marc Giannoni, 2002. "Assessing changes in the monetary transmission mechanism: a VAR approach," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 97-111.
    13. Bernanke, Ben S. & Mihov, Ilian, 1998. "The liquidity effect and long-run neutrality," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 149-194, December.
    14. Paolo Giordani, 2004. "Evaluating New‐Keynesian Models of a Small Open Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 713-733, September.
    15. Frommel, Michael & Schobert, Franziska, 2006. "Exchange rate regimes in Central and East European countries: Deeds vs. words," Journal of Comparative Economics, Elsevier, vol. 34(3), pages 467-483, September.
    16. Willi Semmler, 2011. "Asset Prices, Booms and Recessions," Springer Books, Springer, number 978-3-642-20680-1, June.
    17. Galbraith, John W. & Tkacz, Greg, 2000. "Testing for asymmetry in the link between the yield spread and output in the G-7 countries," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 657-672, October.
    18. Florackis, Chris & Kostakis, Alexandros & Kontonikas, Alexandros, 2011. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," SIRE Discussion Papers 2011-31, Scottish Institute for Research in Economics (SIRE).
    19. Jan Gottschalk & Ulrich Fritsche, 2005. "The New Keynesian Model and the Long-Run Vertical Phillips Curve: Does It Hold for Germany?," Discussion Papers of DIW Berlin 521, DIW Berlin, German Institute for Economic Research.
    20. Dickinson, David & Liu, Jia, 2007. "The real effects of monetary policy in China: An empirical analysis," China Economic Review, Elsevier, vol. 18(1), pages 87-111.

    More about this item

    Keywords

    ;
    ;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:04-22. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bocgvca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.