The simpler, the better: Measuring financial conditions for monetary policy and financial stability

Arbeitspapier

In this paper we assess the merits of financial condition indices constructed using simple averages versus a more sophisticated alternative that uses factor models with time varying parameters. Our analysis is based on data for 18 advanced and emerging economies at a monthly frequency covering about 70% of the world's GDP.We assess the performance of these indicators based on their ability to capture tail risk for economic activity and to predict banking and currency crises. We find that averaging across the indicators of interest, using judgmental but intuitive weights, produces financial condition indices that are not inferior to, and actually perform better than, those constructed with more sophisticated statistical methods. An indicator that gives more weight to measures of financial stress, which we term WA-FSI, emerges as the best indicator for anticipating banking crisis, and is therefore better suited for financial stability.

Angaben zum Objekt

• ISBN: 978-92-861-5088-3
• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: EIB Working Papers ; No. 2021/10

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Business Fluctuations; Cycles ; Financial Markets and the Macroeconomy ; Bayesian Analysis: General ; Large Data Sets: Modeling and Analysis
• Thema: financial conditions ; quantile regressions ; banking crises ; SVARs ; spillovers

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Arrigoni, Simone ; Bobasu, Alina ; Venditti, Fabrizio
• Ereignis: Veröffentlichung
• (wer): European Investment Bank (EIB)
• (wo): Luxembourg
• (wann): 2021

Weitere Informationen

• DOI: doi:10.2867/149278
• Handle: http://hdl.handle.net/10419/245959
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ