Financial Conditions Index: Early and Leading Indicator for Colombia

Esteban Gómez (), Andrés Murcia and Nancy Zamudio ()

Revista ESPE - Ensayos Sobre Política Económica, 2011, vol. 29, issue 66, No 10042, 174-220

Abstract: This paper is an attempt at constructing a simple and effective macroprudential tool for policymakers. By integrating the joint occurrences of the main financialmarkets in Colombia into a single Financial Conditions Index (FCI), we hope to synthesize the information embedded in them regarding possible future economicoutcomes. To do this, we use monthly data on 21 variables for the period comprised between July, 1991 - June, 2010 and apply Principal Component Analysis (PCA) ontheir correlation matrix. On the one hand, we evaluate the predictive capacity of the FCI in forecasting GDP growth at different time horizons and find that it performs better as a leading indicator of real activity than other individual financial variables and an autoregressive model of GDP growth. Additionally, we are interested in testing the FCI´s long-term capability to correctly anticipate periods of distress in the economy, and find that the index could be used as an effective early-warning indicator. Hence, our FCI seems to represent a useful instrument for both financial stability and macroprudential supervision purposes.

Keywords: Financial conditions index; early-warningindicators; leading indicators; macroprudential supervision; principal component analysis (search for similar items in EconPapers)
JEL-codes: E32 E44 E47 E51 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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https://doi.org/10.32468/Espe.6605

Related works:
Journal Article: Financial Conditions Index: Early and Leading Indicator for Colombia (2011)
Working Paper: Financial Conditions Index: Early and Leading Indicator for Colombia? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000107:010042

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