IMF Working Papers

A U.S. Financial Conditions Index: Putting Credit Where Credit is Due

Author/Editor:

Andrew J Swiston

Publication Date:

June 1, 2008

Electronic Access:

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Summary:

This paper uses vector autoregressions and impulse-response functions to construct a U.S. financial conditions index (FCI). Credit availability—proxied by survey results on lending standards—is an important driver of the business cycle, accounting for over 20 percent of the typical contribution of financial factors to growth. A net tightening in lending standards of 20 percentage points reduces economic activity by ¾ percent after one year and 1¼ percent after two years. Much of the impact of monetary policy on the economy also works through its effects on credit supply, which is evidence supporting the existence of a credit channel of monetary policy. Shocks to corporate bond yields, equity prices, and real exchange rates also contribute to fluctuations in the FCI. This FCI is an accurate predictor of real GDP growth, anticipating turning points in activity with a lead time of six to nine months. 15B

Series:

Working Paper No. 2008/161

Subject:

Bank credit Credit Short term interest rates Stocks Vector autoregression

Frequency:

Quarterly