Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France
IMF Working Papers, December 1, 2017
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Bibliographic details
- Authors: Piyabha Kongsamut, Christian Mumssen, Anne-Charlotte Paret, Thierry Tressel
- Published: December 1, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484330968.001
Summary and purpose
- Investigates how information on financial conditions can be used to better understand macroeconomic developments and improve macroeconomic projections for France.
- Constructs country-specific financial conditions indices (FCIs) tailored to movements in GDP, investment, private consumption, and exports respectively.
- Relies on a VAR approach to estimate weights of financial components in each FCI.
Methodology
- Approach: vector auto-regression (VAR) to estimate weights of financial components for each tailored FCI.
- Financial components included:
- equity market returns (noted as having a relatively strong weight across all FCIs),
- private sector risk premiums,
- long-term interest rates,
- banks’ credit standards.
- Application: FCIs incorporated into quarterly forecasting models and high-frequency “nowcast” models.
Key findings
- Tailored FCIs are useful as leading indicators of:
- GDP,
- investment,
- exports.
- Tailored FCIs serve as a contemporaneous indicator of private consumption.
- Credit volumes are identified as lagging indicators of growth.
- FCI-augmented models could have significantly improved forecasts during and after the global financial crisis.
Implications for forecasting and macro-financial linkages
- The indices inform on macro-financial linkages in France and enhance forecast accuracy when incorporated into standard models.
- Use of equity market returns and measures of risk premiums and credit standards improves interpretability of financial-to-real linkages in projections.