Financial conditions index (FCI), inflation and growth: Some evidence

Abstract

This paper first estimate financial conditions index (FCI) for India and then examines the empirical performance of the financial conditions index (FCI) to predict inflation and GDP growth. For optimal coverage of all major set of indicators, those which are determining the Indian economies, financial conditions, so we have broken financial conditions index into four sub-indices including major key indicator. The sub –indices of FCI include (i) short term rate of interest (CMR), (ii) exchange rate, (iii) housing price index (iv) FDI total inflow, each with equal weights. Based on granger causality and correlation test with quarterly data, the finding of this paper is the financial condition index is able to predict inflation bitterly.

Keywords

• monetary conditions index
• financial conditions index
• housing price index