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Quantifying the Effect of Financial Conditions on US Activity

Author

Listed:
  • Stéphanie Guichard

    (OECD)

  • David Turner

    (OECD)

Abstract

This paper constructs a broad measure of financial conditions for the United States which suggests that since the onset of the credit crisis there has been a marked tightening in financial conditions, despite a substantial easing of policy rates and a depreciation of the dollar. This measure of overall financial conditions includes interest rate spreads for riskier borrowers and a survey measure of the tightness of bank lending standards, which have been the main drivers behind the tightening in financial conditions. Indeed, recent data suggest that the trend deterioration in overall financial conditions has continued into the second half of 2008. The effect of the tightening in overall financial conditions already experienced may subtract 1¾ per cent from GDP over the next four to six quarters. Not only have financial conditions continued to worsen, but much of the impact on the real economy has yet to be felt. Une mesure de l'impact des conditions financières sur l'activité aux États-Unis Ce papier propose une mesure des conditions financières au sens large pour les États-Unis suggérant que depuis le début de la crise du crédit, les conditions financières se sont fortement resserrées malgré la baisse substantielle des taux directeurs et la dépréciation du dollar. Cette mesure des conditions financières au sens large inclut les primes de risques supportées par les emprunteurs les plus risqué et les résultats d’une enquête sur le caractère plus ou moins restrictif de l’accès au crédit bancaire. Ces derniers ont été les principaux facteurs conduisant á un durcissement des conditions financières. Les informations les plus récentes suggèrent que les conditions financières au sens large ont continué á se durcir au cours de la seconde moitié de 2008. L’effet du durcissement qui a eu lieu jusqu'à présent pourrait retirer jusqu’á 1¾ pour cent de PIB au cours des quatre à six prochains trimestres. Ainsi, non seulement les conditions financières continuent á se durcir mais une large part de l’impact sur l’économie réelle reste á venir.

Suggested Citation

  • Stéphanie Guichard & David Turner, 2008. "Quantifying the Effect of Financial Conditions on US Activity," OECD Economics Department Working Papers 635, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:635-en
    DOI: 10.1787/236860073636
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    Citations

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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. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi, September.
    3. Muhamed Zulkhibri Abdul Majid, 2012. "Measuring monetary conditions in a small open economy: the case of Malaysia," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 4(3), pages 218-231, July.
    4. Esteban Prieto & Sandra Eickmeier & Massimiliano Marcellino, 2016. "Time Variation in Macro‐Financial Linkages," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1215-1233, November.
    5. Opschoor, Anne & van Dijk, Dick & van der Wel, Michel, 2014. "Predicting volatility and correlations with Financial Conditions Indexes," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 435-447.
    6. repec:hal:spmain:info:hdl:2441/5l6uh8ogmqildh09h560mit97 is not listed on IDEAS
    7. Mansour Ishrakieh, Layal & Dagher, Leila & El Hariri, Sadika, 2018. "The Institute of Financial Economics Financial Stress Index (IFEFSI) for Lebanon," MPRA Paper 116054, University Library of Munich, Germany.
    8. Arrigoni, Simone & Bobasu, Alina & Venditti, Fabrizio, 2020. "The simpler the better: measuring financial conditions for monetary policy and financial stability," Working Paper Series 2451, European Central Bank.
    9. Layal MansourIshrakieh & Leila Dagher & Sadika El Hariri, 2020. "A financial stress index for a highly dollarized developing country : The case of Lebanon," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 20(2), pages 43-52.
    10. Esteban Gómez & Andrés Murcia & Nancy Zamudio, 2011. "Financial Conditions Index: Early and Leading Indicator for Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 29(66), pages 174-220, December.
    11. A. Hakan Kara & Pinar Ozlu & Deren Unalmis, 2012. "Financial Conditions Indices for the Turkish Economy," CBT Research Notes in Economics 1231, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    12. Hakan Kara & Pinar Ozlu & Deren Unalmis, 2015. "Turkiye icin Finansal Kosullar Endeksi," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 15(3), pages 41-73.
    13. Tomislav Globan, 2018. "Financial supply cycles in post-transition Europe – introducing a composite index for financial supply," Post-Communist Economies, Taylor & Francis Journals, vol. 30(4), pages 482-505, July.
    14. repec:spo:wpmain:info:hdl:2441/5l6uh8ogmqildh09h560mit97 is not listed on IDEAS
    15. Ferriani, Fabrizio & Gazzani, Andrea, 2022. "Financial condition indices for emerging market economies: Can Google help?," Economics Letters, Elsevier, vol. 216(C).
    16. Mansour-Ichrakieh, Layal & Zeaiter, Hussein, 2019. "The role of geopolitical risks on the Turkish economy opportunity or threat," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    17. Mahmood, Asif & Ali, Ringchan, 2024. "A Measure of Financial Conditions for Pakistan," MPRA Paper 121952, University Library of Munich, Germany.
    18. Christophe Blot & Sabine Le Bayon & Matthieu Lemoine & Sandrine Levasseur, 2009. "De la crise financière à la crise économique," Post-Print hal-03476072, HAL.
    19. Umit Bulut, 2016. "Do Financial Conditions have a Predictive Power on Inflation in Turkey?," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 621-628.
    20. Anne Opschoor & Dick van Dijk & Michel van der Wel, 2013. "Predicting Covariance Matrices with Financial Conditions Indexes," Tinbergen Institute Discussion Papers 13-113/III, Tinbergen Institute.
    21. repec:idn:journl:v:21:y:2019:i:3:p:1-20 is not listed on IDEAS
    22. Magdalena Erdem & Kostas Tsatsaronis, 2013. "Financial conditions and economic activity: a statistical approach," BIS Quarterly Review, Bank for International Settlements, March.
    23. Borg Ian & Micallef Brian, 2018. "Constructing a Financial Condition Index for a Small-Open Economy: The Case of Malta," Research in Applied Economics, Macrothink Institute, vol. 10(3), pages 89-105, September.
    24. Kimberly Beaton & René Lalonde & Corinne Luu, 2009. "A Financial Conditions Index for the United States," Discussion Papers 09-11, Bank of Canada.
    25. Apergis, Nicholas & Chatziantoniou, Ioannis, 2021. "Credit supply conditions and business cycles: New evidence from bank lending survey data," Research in International Business and Finance, Elsevier, vol. 55(C).

    More about this item

    Keywords

    canal du crédit; contraction du crédit; credit channel; credit crunch; financial conditions index; indice des conditions financières; interest rate spreads; macro-financial linkages; relations macro-financières; écarts de taux d’intérêt;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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