Research Discussion Papers, Bank of Finland
Financial conditions indexes
() and Matti Virén
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; (follow links to similar papers)
JEL-Codes: E31; E44; E58; (follow links to similar papers)
35 pages, September 19, 2001
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