Financial Conditions Indexes

Bank of Finland Working Paper No. 17/2001

35 Pages Posted: 28 Oct 2002

See all articles by David G. Mayes

David G. Mayes

University of Auckland Business School (Deceased)

Matti Viren

Bank of Finland - Research

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

Mayes, David G. and Viren, Matti, Financial Conditions Indexes (September 19, 2001). Bank of Finland Working Paper No. 17/2001, Available at SSRN: https://ssrn.com/abstract=315489 or http://dx.doi.org/10.2139/ssrn.315489

David G. Mayes (Contact Author)

University of Auckland Business School (Deceased)

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Matti Viren

Bank of Finland - Research ( email )

P.O Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2563 (Phone)
+358 10 831 2294 (Fax)

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