The Financial Conditions Index as an additional tool for policymakers in developing countries: the Mexican case

Capasso Salvatore (), Oreste Napolitano and Ana Laura Vivero
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Capasso Salvatore: Università di Napoli Parthenope, ISMed-CNR, and CSEF., https://csef.it/people/salvatore-capasso/
Oreste Napolitano: Università di Napoli Parthenope, ISMed-CNR
Ana Laura Vivero: Universidad Nacional Autónoma de Mexico UNAM

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: The nature of the financial crisis in 2008 posed new challenges for macroeconomic theory and policy-makers. In this context, a financial conditions index (FCI) could be a useful tool to identify the state of financial conditions in a country. We construct three FCIs for Mexico to analyse the role of financial asset prices in formulating monetary policy under an inflation-targeting regime. Using monthly data from 1995 to 2017, we estimate FCIs with three different methodologies and build the index by taking into account the mechanism of transmission of monetary policy and incorporating the most relevant financial variables. Our results show that, likewise for developing countries such as Mexico, an FCI could be a useful tool for managing monetary policy in reducing macroeconomic fluctuations.

Keywords: Financial conditions index; VAR model; ARDL model; TVP-VAR model. (search for similar items in EconPapers)
JEL-codes: C32 E44 G01 O54 (search for similar items in EconPapers)
Date: 2023-01-17
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:664

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