A U.S. Financial Conditions Index: Putting Credit Where Credit is Due

June 1, 2008

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Format: Chicago

Andrew J Swiston. A U.S. Financial Conditions Index: Putting Credit Where Credit is Due, (USA: International Monetary Fund, 2008) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper uses vector autoregressions and impulse-response functions to construct a U.S. financial conditions index (FCI). Credit availability—proxied by survey results on lending standards—is an important driver of the business cycle, accounting for over 20 percent of the typical contribution of financial factors to growth. A net tightening in lending standards of 20 percentage points reduces economic activity by ¾ percent after one year and 1¼ percent after two years. Much of the impact of monetary policy on the economy also works through its effects on credit supply, which is evidence supporting the existence of a credit channel of monetary policy. Shocks to corporate bond yields, equity prices, and real exchange rates also contribute to fluctuations in the FCI. This FCI is an accurate predictor of real GDP growth, anticipating turning points in activity with a lead time of six to nine months. 15B

Subject: Bank credit, Credit, Short term interest rates, Stocks, Vector autoregression

Keywords: Credit availability, Interest rate, Investment grade yield, Lending standard, Real GDP, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/161
Stock No:

WPIEA2008161
ISBN:

9781451870190
ISSN:

1018-5941

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