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Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France

Author

Listed:
  • Ms. Piyabha Kongsamut
  • Mr. Christian Mumssen
  • Anne-Charlotte Paret
  • Mr. Thierry Tressel

Abstract

How can information on financial conditions be used to better understand macroeconomic developments and improve macroeconomic projections? We investigate this question for France by constructing country-specific financial conditions indices (FCIs) that are tailored to movements in GDP, investment, private consumption and exports respectively. We rely on a VAR approach to estimate the weights of the financial components of each FCI, including equity market returns (which turn out having a relatively strong weight across all FCIs), private sector risk premiums, long-term interest rates, and banks’ credit standards. We find that the tailored FCIs are useful as leading indicators of GDP, investment, and exports, and as a contemporaneous indicator of private consumption. Credit volumes turn out to be lagging indicators of growth. The indices inform us on macro-financial linkages in France and are used to improve the accuracy of quarterly forecasting models and high-frequency “nowcast” models. We show that FCI-augmented models could have significantly improved forecasts during and after the global financial crisis.

Suggested Citation

  • Ms. Piyabha Kongsamut & Mr. Christian Mumssen & Anne-Charlotte Paret & Mr. Thierry Tressel, 2017. "Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France," IMF Working Papers 2017/269, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/269
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    Cited by:

    1. Vymyatnina, Yulia V. (Вымятнина, Юлия В.) & Grishchenko, Vadim O. (Грищенко, Вадим О.) & Ostapenko, Vsevolod M. (Остапенко, Всеволод М.) & Ryazanov, Viktor T. (Рязанов, Виктор Т.), 2018. "Financial Instability and Economic Crises: Lessons from Minsky [Финансовая Нестабильность И Экономические Кризисы: Уроки Мински]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 20-41, August.

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