Financial Conditions Index: Early and Leading Indicator for Colombia

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BANCO DE LA REPÚBLICA - ESPE, Revista ESPE - ENSAYOS SOBRE POLÍTICA ECONÓMICA, ISSN: 0120-4483, Vol: 29, Issue: 66, Page: 174-220, No: 66

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Esteban Gómez; Andrés Murcia; Nancy Zamundio
Centro de Apoyo a la Investigacion Economica; Banco de la República; Banco de la República de Colombia
Economics, Econometrics and Finance; Social Sciences; Índice de condiciones financieras; Indicadores de alerta temprana; Indicadores líderes; Supervisión macroprudencial; Análisis de componentes principales; E32 - Business Fluctuations; Cycles; E44 - Financial Markets and the Macroeconomy; E47 - Money and Interest Rates: Forecasting and Simulation: Models and Application; E51 - Money Supply; Credit; Money Multipliers; Financial conditions index; Early-warning indicators; Leading indicators; Macroprudential supervision; Principal component analysis; Indicadores financieros -- Colombia -- 1991-2010; E32 - Fluctuaciones económicas; Ciclos; E44 - Mercados financieros y macroeconomía; E47 - Dinero y tipos de interés: Predicción y simulación; Modelos y aplicación; E51 - Oferta monetaria; Crédito; Multiplicadores monetarios; financial conditions index, Early-Warning Indicators, leading indicators, Macroprudential Supervision, principal component analysis; Financial conditions index, early-warningindicators, leading indicators, macroprudential supervision, principal component analysis
article description
This paper is an attempt at constructing a simple and effective macroprudential tool for policymakers. By integrating the joint occurrences of the main financial markets in Colombia into a single Financial Conditions Index (FCI), we hope to synthesize the information embedded in them regarding possible future economic outcomes. To do this, we use monthly data on 21 variables for the period comprised between July, 1991 - June, 2010 and apply Principal Component Analysis (PCA) on their correlation matrix. On the one hand, we evaluate the predictive capacity of the FCI in forecasting GDP growth at different time horizons and find that it performs better as a leading indicator of real activity than other individual financial variables and an autoregressive model of GDP growth. Additionally, we are interested in testing the FCI's long-term capability to correctly anticipate periods of distress in the economy, and find that the index could be used as an effective early-warning indicator. Hence, our FCI seems to represent a useful instrument for both financial stability and macroprudential supervision purposes.