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Financial conditions and economic activity: a statistical approach

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  • Magdalena Erdem
  • Kostas Tsatsaronis

Abstract

How do conditions in the financial sector affect the macroeconomy? We summarise the common variation in a large array of financial variables into a small set of statistical factors and examine the information content of these factors when forecasting GDP and inflation in four economies. We find that financial factors contain information that is independent of and complementary to that in real variables. This information accounts for a larger proportion of the movement in real and nominal GDP, but a smaller proportion of the variability of inflation.

Suggested Citation

  • Magdalena Erdem & Kostas Tsatsaronis, 2013. "Financial conditions and economic activity: a statistical approach," BIS Quarterly Review, Bank for International Settlements, March.
    • Handle: RePEc:bis:bisqtr:1303f
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    References listed on IDEAS

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    Cited by:

    1. Margarita Debuque-Gonzales & Maria Socorro Gochoco-Bautista, 2017. "Financial Conditions Indexes and Monetary Policy in Asia," Asian Economic Papers, MIT Press, vol. 16(2), pages 83-117, Summer.
    2. Olga Bespalova & Mrs. Marina V Rousset, 2019. "Macrofinancial Linkages and Growth at Risk in the Dominican Republic," IMF Working Papers 2019/246, International Monetary Fund.
    3. Yuji Harada, 2019. "Diversity and transformation of institutional configurations and trust structures," Evolutionary and Institutional Economics Review, Springer, vol. 16(2), pages 479-501, December.
    4. Malibongwe Cyprian Nyati, 2024. "Should Monetary Policy in South Africa Lean against the Wind by Targeting the Financial Cycle?," Economies, MDPI, vol. 12(6), pages 1-20, June.
    5. Nicoletti, Giulio & Wacker, Konstantin M. & Lodge, David, 2014. "Measuring financial conditions in major non-euro area economies," Working Paper Series 1743, European Central Bank.
    6. Kwark, Noh-Sun & Lee, Changhyun, 2021. "Asymmetric effects of financial conditions on GDP growth in Korea: A quantile regression analysis," Economic Modelling, Elsevier, vol. 94(C), pages 351-369.
    7. Simone Auer, 2017. "A Financial Conditions Index for the CEE economies," Temi di discussione (Economic working papers) 1145, Bank of Italy, Economic Research and International Relations Area.
    8. Javier Maldonado & Esther Ruiz, 2021. "Accurate Confidence Regions for Principal Components Factors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(6), pages 1432-1453, December.
    9. Lawson, Jeremy & Watt, Abigail & Martinez, Carolina & Fu, Rong, 2019. "Chinese Financial Conditions and their Spillovers to the Global Economy and Markets," CEPR Discussion Papers 14065, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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