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A Financial Conditions Index for the CEE economies

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  • Simone Auer

    () (Bank of Italy)

Abstract

Financial Conditions Indexes (FCIs) are analytical tools devised to synthesize the information contained in a set of financial variables in order to identify how financial conditions affect economic activity. In this paper, for each of the three main Central and Eastern EU member states outside the euro area (Hungary, Poland and the Czech Republic) an FCI is constructed as an unobserved factor estimated using the EM algorithm. After having assessed their performance in providing information about future economic activity (both in-sample and out-of-sample), these FCIs are used to describe the evolution of financial conditions in the three economies between 2001 and 2016. The overall findings of this study support a narrative whereby all three economies, after their integration into the EU, enjoyed very accommodative financial conditions until 2008; the Czech Republic and Hungary subsequently turned out to have been more exposed than Poland to the spillover effects from both the global financial crisis and euro sovereign debt crisis.

Suggested Citation

  • 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.
  • Handle: RePEc:bdi:wptemi:td_1145_17
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2017/2017-1145/en_tema_1145.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial Conditions Index; dynamic factor models; forecasting; macro-financial linkages;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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