Financial Conditions Indexes
Bank of Finland Working Paper No. 17/2001
35 Pages Posted: 28 Oct 2002
Date Written: September 19, 2001
Abstract
This paper provides an exposition of the nature, means of estimation and uses of Financial Conditions Indexes (FCIs) and their relationship to the more common Monetary Conditions Indexes (MCIs) that are used by market analysts, international organisations and central banks. Using panel datasets for Western Europe we explore how asset prices, particularly house and stock prices, can provide useful additional indicators of future changes in output and inflation. We find a clear role for house prices but a poorly determined relationship for stock prices. Unfortunately the most useful role for FCIs comes from their incorporation of high frequency data and the opportunity this gives for extracting information about changes in market expectations for inflation and output. This helps market participants make judgements about likely central bank reactions and helps central banks assess the stance of policy between forecasts. While stock prices are high frequency, house prices are not. At quarterly frequency central banks in particular will want to use traditional economic forecasting methods and summary indicators like FCIs will have only a limited role. We illustrate how such an FCI can be used, drawing on monthly data for Finland.
Keywords: financial conditions, asset prices, house prices, stock prices
JEL Classification: E44, E58, E31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications
By Douglas Laxton and Guy Meredith
-
Asymmetry and the Problem of Aggregation in the Euro Area
By David G. Mayes and Matti Viren
-
Monetary Policy Rules in Practice: Evidence from New Zealand
By Angela Huang, Dimitri Margaritis, ...
-
Phillips Curves, Phillips Lines and the Unemployment Costs of Overheating
By Peter B. Clark and Douglas Laxton
-
The Inflation-Output Trade-Off: Is the Phillips Curve Symmetric? A Policy Lesson from New Zealand
-
The Nonlinearity of the Phillips Curve and European Monetary Policy
By Ilmo Pyyhtiä
-
Economic Implications of German Unification for the Federal Republic and the Rest of the World
By Paul R. Masson and Guy Meredith
-
Actual and Perceived Monetary Policy Rules in a Dynamic General Equilibrium Model of the Euro Area