Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France

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Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France
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Journal Issue
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Volume/Issue:
2017/269
Series:
IMF Working Papers
Author(s):
Piyabha Kongsamut, Christian Mumssen, Anne-Charlotte Paret, and Thierry Tressel
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
December 2017
DOI:
http://dx.doi.org/10.5089/9781484330968.001
ISBN:
9781484330968
ISSN:
1018-5941
Page:
36
How can information on financial conditions be used to better understand macroeconomic developments and improve macroeconomic projections? We investigate this question for France by constructing country-specific financial conditions indices (FCIs) that are tailored to movements in GDP, investment, private consumption and exports respectively. We rely on a VAR approach to estimate the weights of the financial components of each FCI, including equity market returns (which turn out having a relatively strong weight across all FCIs), private sector risk premiums, long-term interest rates, and banks' credit standards. We find that the tailored FCIs are useful as leading indicators of GDP, investment, and exports, and as a contemporaneous indicator of private consumption. Credit volumes turn out to be lagging indicators of growth. The indices inform us on macro-financial linkages in France and are used to improve the accuracy of quarterly forecasting models and high-frequency 'nowcast' models. We show that FCI-augmented models could have significantly improved forecasts during and after the global financial crisis.
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