A financial conditions index for Iceland
Eysteinn Einarsson,
Stella Einarsdottir,
Tomas Dan Halldorsson and
Vedis Sigridur Ingvarsdottir
Economics from Department of Economics, Central bank of Iceland
Abstract:
In this paper we remedy the lack of formalized relations between financial health and economic activity via a Financial Conditions Index for Iceland (FCI). We use a broad spectrum of financial information including price, spread, volatility and quantity variables, for the period 2002-2023. Variable selection is in line with broad consensus in the relevant literature. In addition, we include variables that are shown to have prediction properties vis-à-vis growth of real GDP over the horizon of two and four quarters ahead. The FCI is constructed using principal component analysis and is normalized such that a positive value indicates that financial conditions are looser than the historical average, while a negative value suggest that financial conditions are tighter than the historical average. We show that fluctuations and extreme events in historical real economic activity is captured by the FCI, implying that it is potentially a leading indicator of GDP developments.
JEL-codes: E44 E52 E61 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-fdg, nep-ifn and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ice:wpaper:wp93
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