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Evaluating Australia's financial conditions: A comparative analysis and extension of a dynamic factor model index

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  • Alexander Khreish

Abstract

This article investigates the unique financial conditions in Australia in the wake of COVID‐19, a subject of critical importance given the recent unprecedented economic events such as the fastest rate rises since the 1990s and the presence of persistently high inflation. This study aims to contribute to the literature by examining the speed of interest rate changes and its implications on financial conditions, particularly in an environment characterised by negative real interest rates. The research aims to extend and refine the financial conditions index (FCI) developed by the Reserve Bank of Australia by incorporating a momentum variable to capture the speed of interest rate changes. A dynamic factor model is utilised to investigate 73 data series across nine main categories, constructing the FCI on a quarterly basis. The results indicate that rapid interest rate changes significantly impact financial conditions, holding significant weights within the model, thus requiring careful policy considerations.

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  • Alexander Khreish, 2024. "Evaluating Australia's financial conditions: A comparative analysis and extension of a dynamic factor model index," Australian Economic Papers, Wiley Blackwell, vol. 63(S1), pages 47-58, May.
    • Handle: RePEc:bla:ausecp:v:63:y:2024:i:s1:p:47-58
    DOI: 10.1111/1467-8454.12358
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    3. Luci Ellis & Chris Naughtin, 2010. "Commercial Property and Financial Stability - An International Perspective," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 25-30, June.
    4. Scott Brave & R. Andrew Butters, 2010. "Gathering insights on the forest from the trees: a new metric for financial conditions," Working Paper Series WP-2010-07, Federal Reserve Bank of Chicago.
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