A Measure of Financial Conditions for Pakistan

Asif Mahmood and Ringchan Ali

MPRA Paper from University Library of Munich, Germany

Abstract: Emerging literature after the global financial crisis of 2007-08 have highlighted the important role of financial conditions as they provide a comprehensive snapshot of the overall economic health and stability. Following this, many academic researchers, central banks and international organizations developed several composite indices, commonly known as Financial Condition Index (indices) or FCIs. In this this study, we attempt to construct the monthly financial conditions index for Pakistan using high-frequency indicators from domestic and external markets. Our results show that much of the post GFC period in Pakistan’s financial system was characterized by accommodative financial conditions, with three but higher intensity phases of tighter financial conditions. Based on the constructed FCI, we also observed that current ongoing episode of tightening is on average longer than previous two phases. In terms of drivers, our estimations reveal the increasing role of interest rates in determining the financial conditions in Pakistan during the sample period. Moreover, the preliminary analysis does indicate some underlying qualities in our constructed FCI to forecast near-term growth with reasonable precision.

Keywords: Financial Conditions Index; Principal Component Analysis; Forecasting (search for similar items in EconPapers)
JEL-codes: C43 C53 E44 E52 (search for similar items in EconPapers)
Date: 2024-09-06
New Economics Papers: this item is included in nep-fdg, nep-fle, nep-ifn and nep-isf
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