Financial Conditions Indexes

Abstract

The recent financial crisis helped emphasize the need for measures of financial conditions. In the wake of the crisis, several researchers and institutions-both private sector and central bank-developed measures of financial stress. These measures are intended to capture, among other things, the liquidity in financial markets and potentially forecast changes in real economic conditions. Unfortunately, there is no agreement about which variables should be included in a measure of stress. The authors survey a number of financial stress indexes, comparing the datasets from which they are constructed. In principle, each of the indexes measures the same thing; thus, they should be highly correlated. The authors find that in practice, however, the correlations are high but not as high as might be expected. They also evaluate the ability of the indexes to predict future economic activity in a simple vector autoregressive fore-