A Financial Conditions Index for Poland

IMF Working Papers, December 19, 2013

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This paper constructs a financial conditions index (FCI) for Poland to explore the link between financial conditions and real economic activity.
The index is constructed by applying two complementary approaches—factor analysis and vector auto-regression (VAR).
The FCI is evaluated against a composite leading indicator (CLI) developed by the OECD.
Key empirical result: the FCI is highly correlated with GDP growth, attesting to the importance of the financial sector in Poland’s economy.
Forecast performance: in-sample and out-of-sample forecasting exercises indicate that the FCI can outperform the CLI in predicting near-term GDP growth.

Approaches used:
- Factor analysis (factor FCI)
- Vector autoregression (VAR FCI)
Comparison benchmark:
- Composite leading indicator (CLI) developed by the OECD

The FCI shows a high correlation with GDP growth in Poland.
The financial sector plays an important role in influencing real economic activity in Poland.
Forecasting exercises (both in-sample and out-of-sample) show the FCI can outperform the OECD CLI for near-term GDP growth prediction.