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Prepared by Salifou Issoufou, based on the Mauritius 2019 Article IV Consultation Selected Issues Paper titled “Developing A Financial Conditions Index for Mauritius” prepared by Salifou Issoufou and Torsten Wezel.
However, it may be sensible to exclude candidate variables that have a low predictive power of GDP growth in a VAR (Gómez et al., 2011).
Note that the ordering would change based on the software used to estimate the VAR as some software use a lower triangular matrix while others use upper triangular matrix when implementing the Cholesky ordering. This ensures that the response of the variable to a shock would be zero contemporaneously if the response variable is ordered in such a way that it is not affected by the shock variable on impact.
Put differently, a principal component is a weighted average of the variables where the weights (“loadings”) are derived so that the index explains the maximum amount of variation of all included financial variables (Krznar and Matheson, 2017). In practice, only the first few principal components are considered for the FCI, assuming they capture a large share of the variation cumulatively (e.g. a minimum of 70 percent, as suggested by Gómez et al., 2011, and Khundrakpam et al., 2017).
Essentially, Xt is replaced by Zt = [Xt – Xt-p] in equation (2), where p in the number of lags. We include 1 lag based on results from performing the Akaike Information Criterion (AIC) lag selection test.
All the factor loadings are statistically significant except for the average lending rate.
See IMF Country Report No. 11/5.
Optimal lags based on AIC are higher, and more unstable, than those based on BIC.
According to the BCBS (2010), banks should start building the CCB when the credit-to-GDP gap surpasses 2 percentage points, up to a maximum of 10 percentage points, at which point the maximum size of the CCB of 2.5 percent of risk-weighted assets is normally reached. Banks can reduce the buffer when allowed so by the regulator. This is normally the case when the credit boom episode is over or when bank losses rise in a downturn.
Consistent information on NPLs is available only from 2008.