Author: Ms. Piyabha Kongsamut, Mr. Christian Mumssen, Anne-Charlotte Paret, and Mr. Thierry Tressel
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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