Financial Conditions Index
About
A Financial Conditions Index (FCI) is a weighted average of financial variables. The weights are determined using regression analysis according to the impact of a given variable on economic activity. Downward movements in the FCI capture tighter financial conditions, which are therefore consistent with weaker economic activity; upward movements represent improving financial conditions, which would be consistent with stronger economic activity.
Financial Variables
The descriptions of the FCI components, along with their weights and the lags (in quarters) with which they enter the FCI, are as follows:
| FCI Component | Description | Weight | Lag in quarters |
|---|---|---|---|
| Credit conditions | Balance of opinion regarding overall business-lending conditions, taken from the Senior Loan Officer Survey. Calculated as the weighted percentage of surveyed institutions reporting tightened credit conditions minus the weighted percentage reporting eased credit conditions. | -0.00019 | 1 |
| Corporate bond spread | It is measured as the difference between an effective corporate bond rate and the 5-year Government of Canada rate. The effective corporate rate attaches an 87.5% weight to the Merrill Lynch investment-grade corporate bond index, and a 12.5% weight to Canadian high-yield bonds. | -0.06306 | 0 |
| Short-term interest rate | The overnight rate. | -0.01338 | 0 |
| Long-term interest rate | The average yield on ten-year Government of Canada bonds. | -0.02258 | 1 |
| Real exchange rate | Year-over-year growth of the trade-weighted nominal exchange rate relative to the GDP deflator ratio of Canada and our major trading partners. | -0.01265 | 2 |
| Stock prices | Ratio of the TSX index to nominal GDP, which approximates the deviation of stock prices from fundamental economic activity. | 0.00164 | 0 |
| Housing prices | New House Price Index divided by CPI. | 0.00135 | 1 |
The FCI is normalized with an average of zero over the last ten years, so values above zero indicate that conditions are better than the average, while negative values denote that conditions are worse than average.1
One variable in our equation, the Senior Loan Officer Survey, is only updated once every quarter, so a formal update of the FCI can only be undertaken once every quarter. However, given that the other variables change on a more frequent basis, we calculate a weekly version of the FCI that assumes that the Senior Loan Officer Survey does not change over the quarter.