Financial Conditions Indexes: A Fresh Look after the Financial Crisis

58 Pages Posted: 7 Jul 2010 Last revised: 19 Aug 2010

See all articles by Jan Hatzius

Jan Hatzius

Goldman Sachs

Peter Hooper

Deutsche Bank Securities, Inc. - Global Markets Research, Economy

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Kermit L. Schoenholtz

New York University - Stern School of Business - Department of Economics

Mark W. Watson

Princeton University - Woodrow Wilson School of Public and International Affairs; National Bureau of Economic Research (NBER)

Date Written: July 2010

Abstract

This paper explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes. Third, we control for past GDP growth and inflation and thus focus on the predictive power of financial conditions for future economic activity. During most of the past two decades for which comparisons are possible, including the last five years, our FCI shows a tighter link with future economic activity than existing indexes, although some of this undoubtedly reflects the fact that we selected the variables partly based on our observation of the recent financial crisis. As of the end of 2009, our FCI showed financial conditions at somewhat worse-than-normal levels. The main reason is that various quantitative credit measures (especially issuance of asset backed securities) remained unusually weak for an economy that had resumed expanding. Thus, our analysis is consistent with an ongoing modest drag from financial conditions on economic growth in 2010.

Suggested Citation

Hatzius, Jan and Hooper, Peter and Mishkin, Frederic S. and Schoenholtz, Kermit L. and Watson, Mark W., Financial Conditions Indexes: A Fresh Look after the Financial Crisis (July 2010). NBER Working Paper No. w16150. Available at SSRN: https://ssrn.com/abstract=1635673

Peter Hooper

Deutsche Bank Securities, Inc. - Global Markets Research, Economy ( email )

60 Wall Street
Mail Stop: NYC60-1815
New York, NY 10005
United States

Frederic S. Mishkin

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kermit L. Schoenholtz

New York University - Stern School of Business - Department of Economics ( email )

44 W. 4th Street
Suite 7-89
New York, NY 10012
United States
212-998-0868 (Phone)

HOME PAGE: http://w4.stern.nyu.edu/faculty/bio/kim-schoenholtz

Mark W. Watson

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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