IMF Working Papers

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

By Piyabha Kongsamut, Christian Mumssen, Anne-Charlotte Paret, Thierry Tressel

December 1, 2017

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Piyabha Kongsamut, Christian Mumssen, Anne-Charlotte Paret, and Thierry Tressel. Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France, (USA: International Monetary Fund, 2017) accessed September 24, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Consumption, Credit, Economic forecasting, Financial markets, Money, National accounts, Return on investment, Stock markets

Keywords: Center, Citi FCI, Construction method, Consumption, Consumption FCI, Credit, Credit standard, ECB FCI, Export FCI, FCI model, FCI-augmented model, Financial condition, Financial conditions index, Forecasting, France, GDP, GDP figure, GDP-linked FCI, Global, Goldman Sachs FCI, Interpretable FCI, Investment FCI, Macro-financial linkages, Return on investment, Stock markets, Vector auto-regression, WP

Publication Details

  • Pages:

    36

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2017/269

  • Stock No:

    WPIEA2017269

  • ISBN:

    9781484330968

  • ISSN:

    1018-5941

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