Measuring Financial Conditions in Major Non-Euro Area Economies

47 Pages Posted: 3 Dec 2014

See all articles by Konstantin M. Wacker

Konstantin M. Wacker

University of Groningen - Faculty of Economics and Business

David Lodge

European Central Bank (ECB)

Giulio Nicoletti

European Central Bank

Date Written: November 20, 2014

Abstract

In this paper, we develop financial conditions indices (FCIs) for 3 industrialized (US, Japan, UK) and 5 emerging (China, Brazil, Russia, India, Turkey) economies. The FCIs are formed as the principal component of a range of financial series for each country and are constructed to account for fluctuations in the business cycle. We show that these FCIs can help predict growth developments and thereby provide a potential leading indicator for the external environment of the Euro area. While we draw upon established methodological considerations in the literature, our main contribution lies in providing FCIs which are available for a broad set of countries, including many emerging economies, and whose movements can intuitively be interpreted. This latter fact allows us to track developments in the 8 investigated financial markets over the last decade.

Keywords: financial conditions index, FCI, principal component analysis, forecasting

JEL Classification: C43, E37, E44, G1

Suggested Citation

Wacker, Konstantin M. and Lodge, David and Nicoletti, Giulio, Measuring Financial Conditions in Major Non-Euro Area Economies (November 20, 2014). ECB Working Paper No. 1743, Available at SSRN: https://ssrn.com/abstract=2528401

Konstantin M. Wacker (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

HOME PAGE: http://sites.google.com/rug.nl/kmwacker

David Lodge

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Giulio Nicoletti

European Central Bank ( email )

Kaiserstrasse 29
Frankfurt am Main, Hessen 60311
Germany

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