| Abstract: |
Emerging literature after the global financial crisis of 2007-08 have
highlighted the important role of financial conditions as they provide a
comprehensive snapshot of the overall economic health and stability. Following
this, many academic researchers, central banks and international organizations
developed several composite indices, commonly known as Financial Condition
Index (indices) or FCIs. In this this study, we attempt to construct the
monthly financial conditions index for Pakistan using high-frequency
indicators from domestic and external markets. Our results show that much of
the post GFC period in Pakistan’s financial system was characterized by
accommodative financial conditions, with three but higher intensity phases of
tighter financial conditions. Based on the constructed FCI, we also observed
that current ongoing episode of tightening is on average longer than previous
two phases. In terms of drivers, our estimations reveal the increasing role of
interest rates in determining the financial conditions in Pakistan during the
sample period. Moreover, the preliminary analysis does indicate some
underlying qualities in our constructed FCI to forecast near-term growth with
reasonable precision. |