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The authors thank Tam Bayoumi, Marcello Estevão, Vladimir Klyuev, Charles Kramer, Par Österholm, Andy Swiston, Pierre St-Amant, Erica Tsounta and seminar participants at the Department of Finance, Ottawa, Canada, for many helpful comments and suggestions.
The Bank of Canada constructs a high frequency financial conditions index using domestic financial indicators, including overall lending standards (see http://credit.bank-banque-canada.ca/financialconditions for details). See Bayoumi and Melander (2008) and Swiston (2008) for the impact of the U.S. lending standards on U.S. real economic activity.
Note that the measure, like its U.S. counterpart, indicates the direction of change in lending conditions (i.e., an increase in the indicator shows that the share of the financial institutions experiencing a tightening of credit conditions has increased) rather than providing any information on the magnitude of the tightening.
These results are available upon request.
The pass- through from the conditional forecast analyses is not identical to the impulse responses, as the former provides responses of Canada’s growth to changes in annual average levels of the underlying variables, while the latter corresponds to responses to shocks to the underlying variable in a particular quarter.
See Swiston (2009) for a description of the construction of a financial conditions index.
The MFCI also relates well with the Bank of Canada’s weekly financial conditions index, which shows a persistent tightening of financial conditions in the Canadian economy from mid 2008 until the end of the year.
Recent data appear to suggest that US economic conditions have indeed continued to bear on Canadian prospects; and lending standards in both economies remain tight as well—although less so than before. However, contrary to the model’s projection, the real exchange rate has also continued to be a drag on growth.