Financial Conditions Indexes: A Fresh Look after the Financial Crisis

Jan Hatzius, Peter Hooper, Frederic S. Mishkin, Kermit L. Schoenholtz, Mark W. Watson

NBER Working Paper No. 16150
Issued in July 2010
NBER Program(s):   EFG   ME

This paper explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes. Third, we control for past GDP growth and inflation and thus focus on the predictive power of financial conditions for future economic activity. During most of the past two decades for which comparisons are possible, including the last five years, our FCI shows a tighter link with future economic activity than existing indexes, although some of this undoubtedly reflects the fact that we selected the variables partly based on our observation of the recent financial crisis. As of the end of 2009, our FCI showed financial conditions at somewhat worse-than-normal levels. The main reason is that various quantitative credit measures (especially issuance of asset backed securities) remained unusually weak for an economy that had resumed expanding. Thus, our analysis is consistent with an ongoing modest drag from financial conditions on economic growth in 2010.

download in pdf format
   (713 K)

email paper

This paper is available as PDF (713 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16150

Published: U.S. Monetary Policy Forum: “Financial Conditions Indexes: A Fresh Look After the Financial Crisis,” (with Jan Hatzius, Peter Hooper, Frederic Mishkin, Kermit L. Schoenholtz and Mark W. Watson) U.S. Monetary Policy Forum (Chicago: Chicago Booth Initiative on Global Markets, 2010) pp. 3-59.

Users who downloaded this paper also downloaded these:
Reinhart and Rogoff w14656 The Aftermath of Financial Crises
Reinhart and Rogoff w15795 From Financial Crash to Debt Crisis
Taylor w14631 The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong
Hurd and Rohwedder w16407 Effects of the Financial Crisis and Great Recession on American Households
Kahle and Stulz w16310 Financial Policies and the Financial Crisis: How Important Was the Systemic Credit Contraction for Industrial Corporations?
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us