The Reaction of the Financial Conditions Index to the Macroeconomic Variables Shocks

Document Type : Research Paper

Authors

1 Department of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran.

2 Department of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran

10.22059/ier.2025.356323.1007667

Abstract

The financial and real sectors are intrinsically related and the financial sector is affected by the systematic risks of the real sector. So, this study was done to investigate the reaction of the financial conditions index to the macroeconomic variables shocks in Iran with the time-varying parameter factor-augmented vector autoregressive model (TVP-FAVAR) and using quarterly data from 1991 to 2019. The results show that the macroeconomic variables shocks are an important factor in explaining the behavioral changes of the financial conditions index. In other words, the financial conditions index has shown different reactions to the macroeconomic variables shocks over time, and the intensity and extent of this reaction have not been the same for each of the macroeconomic variables. Therefore, policymakers should adopt appropriate policies according to the effects of macro variables on the economy so that they can ultimately improve the financial conditions of the country.
 

Keywords

Main Subjects


Acharya, V., & Naqvi, H. (2012). The Seeds of a Crisis: A Theory of Bank Liquidity and Risk Taking over the Business Cycle. Journal of Financial Economics, 106(2), 349-366. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1719428
Adrian, T., Boyarchenko, N., & Giannone, D. (2019). Vulnerable Growth. American Economic Review, 109(4), 1263-1289. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2845784
Adrian, T., & Liang, N. (2016). Monetary Policy, Financial Conditions, and Financial Stability. CEPR Discussion Paper, Retrieved from https://ssrn.com/abstract=2811090
Adrian, T., & Shin, H. S. (2010). Financial Intermediaries and Monetary Economics. Handbook of Monetary Economics, 3, 601-650. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1491603
Altunbas, Y., Gambacorta, L., & Marques-Ibanez, D. (2010). Does Monetary Policy Affect Bank Risk-Taking? ECB Working Paper, 1166, Retrieved from https://ssrn.com/abstract=1574188
Angelopoulou, E., Balfoussia, H., & Gibson, H. D. (2014). Building a Financial Conditions Index for the Euro Area and Selected Euro Area Countries: What Does it Tell Us about the Crisis? Economic Modelling, 38, 392–403. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2253844
Arman, S. A., Anvari, E., & RakiKianpour, S. (2022). The Modeling of the Dynamic Financial Conditions Index and Assessing It’s Effectiveness in Predicting Iran’s Stock Returns. Journal of Asset Management and Financing, 10(1), 47-72. Retrieved from https://amf.ui.ac.ir/article_26718_en.html?lang=fa
Bernanke, B. S., & Gertler, M. (1986). Agency Costs, Collateral, and Business Fluctuations. Working Paper, Retrieved from https://www.nber.org/system/files/working_papers/w2015/w2015.pdf
Boivin, J., Kiley, M. T., & Mishkin, F. S. (2010). How has the Monetary Transmission Mechanism Evolved over Time? In Handbook of Monetary Economics, 3, 369-422. Retrieved from https://www.nber.org/system/files/working_papers/w15879/w15879.pdf
Brunnermeier, M. K., & Sannikov, Y. (2014). A Macroeconomic Model with a Financial Sector. American Economic Review, 104(2), 379-421. Retrieved from https://www.econstor.eu/bitstream/10419/144448/1/wp236en.pdf
Christiano, L. J., Motto, R., & Rostagno, M. (2014). Risk Shocks. American Economic Review, 104(1), 27-65. Retrieved from https://www.nber.org/system/files/working_papers/w18682/w18682.pdf
Dell'Ariccia, G., Laeven, L., & Suarez, G. A. (2017). Bank Leverage and Monetary Policy's Risk‐Taking Channel: Evidence from the United States. the Journal of Finance, 72(2), 613-654. Retrieved from https://www.econstor.eu/bitstream/10419/154336/1/ecbwp1903.pdf
Deng, C., Teng, L., & Xu, M. (2016). The Fluctuation of China's Financial Conditions and Its Macroeconomic Effects. Studies of International Finance, 3, 17-27. Retrieved from https://jpbud.ir/browse.php?a_id=2197&sid=1&slc_lang=fa
Doz, C., Giannone, D., & Reichlin, L. (2011). A Two-Step Estimator for Large Approximate Dynamic Factor Models Based on Kalman Filtering. Journal of Econometrics, 164(1),188–205. Retrieved from https://hal.science/hal-00844811/document
Ganchev, G. T., & Paskaleva, M, G.(2020). The Importance of Financial Condition Indices in South-Eastern Europe. International Journal of Contemporary Economics and Administrative Sciences, 10(1), 78-106. Retrieved from http://www.ijceas.com/index.php/ijceas/article/download/335/253
Gilchrist, S., & Zakrajšek, E. (2012). Credit Spreads and Business Cycle Fluctuations. American Economic Review, 102(4), 1692-1720. Retrieved from https://www.nber.org/system/files/working_papers/w17021/w17021.pdf
Gómez , E., Murcia, A., & Zamudio, N. (2011). Financial Conditions Index: Early and Leading Indicator for Colombia? Ensayos sobre Politica Economica, 29(66), 174-221. Retrieved from http://www.scielo.org.co/scielo.php?pid=S0120-44832011000300006&script=sci_arttext&tlng=en
Goodhart, C., & Hofmann, B. (2001). Asset Prices, Financial Conditions, and the Transmission of Monetary Policy. Conference on Asset Prices, Exchange Rates, and Monetary Policy, Stanford University, Stanford. Retrieved from https://www.frbsf.org/wp-content/uploads/0103conf6.pdf
Hatzius, J., Hooper, P., Mishikin, F. S., Schoenholtz, K. L., & Watson M. W. (2010). Financial Conditions Indexes: A Fresh Look After The Financial Crisis.  National Bureau of Economic Research, Retrieved from https://www.nber.org/system/files/working_papers/w16150/w16150.pdf
Herculano, M. C. (2022). A Monthly Financial Conditions Index for New Zealand. Reserve Bank of New Zealand, Retrieved from https://ideas.repec.org/p/nzb/nzbdps/2022-1.html
He, Z., & Krishnamurthy, A. (2012). A Model of Capital and Crises. The Review of Economic Studies, 79(2), 735-777. Retrieved from https://www.nber.org/system/files/working_papers/w14366/w14366.pdf
Huang, Y. F., Liao, W., & Luo, S. (2022). Financial Conditions, Macroeconomic Uncertainty, and Macroeconomic Tail Risks. Retrieved from https://ssrn.com/abstract=4212865
Jermann, U., & Quadrini, V. (2012). Macroeconomic Effects of Financial Shocks. American Economic Review, 102(1), 238-271. Retrieved from https://www.nber.org/system/files/working_papers/w15338/w15338.pdf
Kazdal, A., Korkmaz, H. İ., & Yilmaz, M. H. (2022). Composing a High-Frequency Financial Conditions Index and the Implications for Economic Activity. Borsa Istanbul Review, 22(4), 769-779. Retrieved from https://www.sciencedirect.com/science/article/pii/S2214845022000023
Kiyotaki, N., & Moore, J. (1997). Credit Cycles. Journal of Political Economy105(2), 211-248. Retrieved from https://www.nber.org/system/files/working_papers/w5083/w5083.pdf
Koop, G., & Korobilis, D. (2014). A New Index of Financial Conditions. European Economic Review, 71, 101–116. Retrieved from https://eprints.gla.ac.uk/95030/1/95030.pdf
---------- (2013). A New Index of Financial Conditions. SSRN, 2347980, Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2374980
Li, N., & Yuanchun, L. (2019). Construction of China’s Financial Conditions Index in the Post-Crisis Era. China Political Economy, 2(2), 258-276. Retrieved from https://www.emerald.com/insight/content/doi/10.1108/cpe-10-2019-0025/full/pdf
Liu, Z., Wang, P., & Zha, T. (2013). Land‐price Dynamics and Macroeconomic Fluctuations. Econometrica, 81(3), 1147-1184. Retrieved from https://www.nber.org/system/files/working_papers/w17045/w17045.pdf
Mayes, D., & Viren, M. (2001). Financial Conditions Indexes. Bank of Finland Working Paper, 17/2001, Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=315489
Mbelu, A., & Soobyah, L. (2019). Financial Conditions Indices and Economic Downturn: New Evidence from Developing Economies. The Economic Society of South Africa, 3897, Retrieved from file:///C:/Users/TORANJ/Downloads/essa_3897.pdf
Miranda-Agrippino, S., & Rey, H. (2015). World Asset Markets and the Global Financial Cycle. Cambridge, MA: National Bureau of Economic Research. Retrieved from https://www.aeaweb.org/conference/2015/retrieve.php?pdfid=2270&tk=7E7fr7Tk
Mohseni, H., Pahlevani, M., Shahiki Tash, M. N., & Mir Jalili, S. H. (2019). Analyzing the Role of Unconventional Monetary Policy Using the Financial Conditions Index: A Bayesian Self-Explained Approach. Quarterly Journal of Economics and Modeling, 1, 211-240. Retrieved from https://ecoj.sbu.ac.ir/article_87141_1daac734b5c2cb7cbb9182906e3155db.pdf
Montagnoli, A., & Napolitano, O. (2005). Financial Conditions Index and Interest Rate Settings: A Comparative Analysis. Instituto di Studi Economici Working Paper, 8, Retrieved from https://core.ac.uk/download/pdf/6759114.pdf
Morana, C. (2021). A New Macro-Financial Conditions Index for the Euro Area.  Econometrics and Statistics, Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S245230622100112X
Plasil, M., Seidler, J., & Hlaváč, P. (2016). A New Measure of the Financial Cycle: Application to the Czech Republic. Eastern European Economics, 54(4), 296–318. Retrieved from https://www.tandfonline.com/doi/abs/10.1080/00128775.2016.1192950
Rajan, R. G. (2006). Has Finance Made the World Riskier? European Financial Management, 12(4), 499-533. Retrieved from https://www.tandfonline.com/doi/abs/10.1080/00128775.2016.1192950
Stein, J. C. (2012). Monetary Policy as Financial Stability Regulation. The Quarterly Journal of Economics, 127(1), 57-95. Retrieved from https://www.nber.org/system/files/working_papers/w16883/w16883.pdf
Swiston, A. (2008). A U. S. Financial Conditions Index: Putting Credit Where Credit is Due. International Monetary Fund, Retrieved from https://www.imf.org/en/Publications/WP/Issues/2016/12/31/A-U-S-22077
Taghizadeh, H., Zamanian, G., & Harati, J. (2016). Calculation of Indicators of Monetary and Financial Conditions Using the Method of Analysis of Basic Components for the Iranian Economy. Iranian Journal of Applied Economic Studies, 19, 29-57. [in Persian] Retrieved from http://journals.basu.ac.ir/article_1597_f464c3838874b9b9ecc9df74787e0990.pdf
Wacker, K. M., Lodge, D., & Nicoletti, G. (2014). Measuring Financial Conditions in Major Non-Euro Area Economics. Working Paper Series, 1743, Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2528401