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Financial Conditions Indicators for Brazil

Wagner Gaglianone () and Waldyr Areosa ()

No 435, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: In this paper, we propose a methodology to construct a Financial Conditions Indicator (FCI) based on Brave and Butters (2011) and Aramonte et al. (2013). The main idea is to use a selected set of economic and financial time series and aggregate their information content into a single index that summarizes the overall financial conditions of the economy. This approach can be further employed to forecast economic activity. An empirical exercise for Brazil is provided to illustrate the methodology, in which a modified IS-type equation (substituting the interest rate by the FCI) is employed to point forecast the output gap. In addition, a standard quantile regression technique (e.g. Koenker, 2005) is used to construct density forecasts and generate fan charts of future economic activity. A risk analysis is conducted within this setup in order to compute conditional probabilities of the output growth to be above/below a given scenario

Date: 2016-05
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