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The Financial Conditions Index as an additional tool for policymakers in developing countries: the Mexican case

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Abstract

The nature of the financial crisis in 2008 posed new challenges for macroeconomic theory and policy-makers. In this context, a financial conditions index (FCI) could be a useful tool to identify the state of financial conditions in a country. We construct three FCIs for Mexico to analyse the role of financial asset prices in formulating monetary policy under an inflation-targeting regime. Using monthly data from 1995 to 2017, we estimate FCIs with three different methodologies and build the index by taking into account the mechanism of transmission of monetary policy and incorporating the most relevant financial variables. Our results show that, likewise for developing countries such as Mexico, an FCI could be a useful tool for managing monetary policy in reducing macroeconomic fluctuations.

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  • Capasso Salvatore & Oreste Napolitano & Ana Laura Vivero, 2023. "The Financial Conditions Index as an additional tool for policymakers in developing countries: the Mexican case," CSEF Working Papers 664, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:664
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    Keywords

    Financial conditions index; VAR model; ARDL model; TVP-VAR model.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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