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Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France
Author:
Ms. Piyabha Kongsamut
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,
Mr. Christian Mumssen
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Anne-Charlotte Paret null

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Mr. Thierry Tressel
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Series:
IMF Working Papers
Volume/Issue:
Volume 2017: Issue 269
Language:
English
Publication Date:
01 Dec 2017
DOI:
https://doi.org/10.5089/9781484330968.001
ISBN:
9781484330968
ISSN:
1018-5941
Pages:
36
Keywords:
WP; Citi FCI; financial condition; center; GDP; France; financial conditions index; macro-financial linkages; vector auto-regression; forecasting; GDP-linked FCI; consumption FCI; credit standard; construction method; export FCI; interpretable FCI; FCI-augmented model; FCI model; investment FCI; Goldman Sachs FCI; ECB FCI; GDP figure; Stock markets; Credit; Consumption; Return on investment; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund