Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France

37 Pages Posted: 18 Jan 2018

See all articles by Piyabha P. Kongsamut

Piyabha P. Kongsamut

University of Rochester - Department of Economics

Christian Mumssen

International Monetary Fund (IMF)

Anne-Charlotte Paret

Banque de France

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Date Written: December 2017

Abstract

How can information on financial conditions be used to better understand macroeconomic developments and improve macroeconomic projections? We investigate this question for France by constructing country-specific financial conditions indices (FCIs) that are tailored to movements in GDP, investment, private consumption and exports respectively. We rely on a VAR approach to estimate the weights of the financial components of each FCI, including equity market returns (which turn out having a relatively strong weight across all FCIs), private sector risk premiums, long-term interest rates, and banks' credit standards. We find that the tailored FCIs are useful as leading indicators of GDP, investment, and exports, and as a contemporaneous indicator of private consumption. Credit volumes turn out to be lagging indicators of growth. The indices inform us on macro-financial linkages in France and are used to improve the accuracy of quarterly forecasting models and high-frequency 'nowcast' models. We show that FCI-augmented models could have significantly improved forecasts during and after the global financial crisis.

Keywords: Europe, France, Forecasting, financial conditions index, macro-financial linkages, vector auto-regression, refers to exports volume of goods, General, Forecasting and Simulation

JEL Classification: E27, C30, E30, E10

Suggested Citation

Kongsamut, Piyabha P. and Mumssen, Christian and Paret, Anne-Charlotte and Tressel, Thierry, Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France (December 2017). IMF Working Paper No. 17/269, Available at SSRN: https://ssrn.com/abstract=3104539

Piyabha P. Kongsamut (Contact Author)

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627-0158
United States
301-770-3789 (Phone)

Christian Mumssen

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Anne-Charlotte Paret

Banque de France ( email )

Paris
France

Thierry Tressel

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
15
Abstract Views
184
PlumX Metrics