The purpose of this paper is to develop the new financial conditions index of Korea. This paper uses the methodology by Hatzius et al. (2010), to analyze the key components of the 10 main financial variables representing the bond market, stock market, foreign exchange market, and credit market and thereby to find commonalities between these variables. This paper then calculates, based on these findings, a financial conditions index which amalgamates the current financial situations and represents them using a single numerical index. In particular, this paper has tried to overcome the limits of the existing financial conditions indices by controlling for the endogenous effects the real economies of the past and the present have on the financial market and only considering the exogenous changes in the financial market which can affect the future real economy when developing the index.
The newly developed index has produced better results than other financial indices in predicting major macroeconomic variables, for example, the economic growth rate. In particular, it has high predictive power regarding the recession during the period of the recent global financial crisis. Meanwhile, the index has also been shown to have significant influence on real economic variables, such as the growth rate and inflation, when analyzed using the dynamic stochastic general equilibrium (DSGE) model.
It is expected that by considering the new financial conditions index presented in this paper along with the current economic conditions and movements in other economic variables we will be able to make more accurate predictions regarding future economic conditions and hence suggest more appropriate directions for policy responses.
KIF 금융상황지수(KIF financial conditions index)
서울 : 한국금융연구원
|Series Title; No||기타보고서|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||한국금융연구원; KDI 국제정책대학원|