Financial Conditions Indexes: A Fresh Look After The Financial Crisis
This paper explores the link between financial conditions and economic activity. The authors first review existing measures, including both single indicators and composite Financial Conditions Indexes (FCIs). They then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, the use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes. Third, they control for past GDP growth and inflation and thus focus on the predictive power of financial conditions for future economic activity.