NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Users who downloaded this paper also downloaded these:
Mishkin w16755 Monetary Policy Strategy: Lessons from the Crisis
Mishkin w14678 Is Monetary Policy Effective During Financial Crises?
Boivin, Kiley, and Mishkin w15879 How Has the Monetary Transmission Mechanism Evolved Over Time?
Frankel and Saravelos w16047 Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis
Reinhart and Rogoff w13761 Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison
 
Publications
Activities
Meetings
Data
People
About

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

Contact Us