Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France

Piyabha Kongsamut, Christian Mumssen, Anne-Charlotte Paret and Thierry Tressel

No 2017/269, IMF Working Papers from International Monetary Fund

Abstract: How can information on financial conditions be used to better understand macroeconomic developments and improve macroeconomic projections? We investigate this question for France by constructing country-specific financial conditions indices (FCIs) that are tailored to movements in GDP, investment, private consumption and exports respectively. We rely on a VAR approach to estimate the weights of the financial components of each FCI, including equity market returns (which turn out having a relatively strong weight across all FCIs), private sector risk premiums, long-term interest rates, and banks’ credit standards. We find that the tailored FCIs are useful as leading indicators of GDP, investment, and exports, and as a contemporaneous indicator of private consumption. Credit volumes turn out to be lagging indicators of growth. The indices inform us on macro-financial linkages in France and are used to improve the accuracy of quarterly forecasting models and high-frequency “nowcast” models. We show that FCI-augmented models could have significantly improved forecasts during and after the global financial crisis.

Keywords: WP; Citi FCI; financial condition; center; GDP; France; financial conditions index; macro-financial linkages; vector auto-regression; forecasting; GDP-linked FCI; consumption FCI; credit standard; construction method; export FCI; interpretable FCI; FCI-augmented model; FCI model; investment FCI; Goldman Sachs FCI; ECB FCI; GDP figure; Stock markets; Credit; Consumption; Return on investment; Global (search for similar items in EconPapers)
Pages: 36
Date: 2017-12-01
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