Doo Yong Yang: This paper constructs financial conditions indexes (FCIs) for Asian economies using a common factor method. The authors found that bank-related indicators, various measures of financial stress and risk, and credit surveys fully reflect the state of the financial environment in Asia among a wide range of financial variables. Second, the FCIs for Asia successfully capture important episodes in each economy's financial history. This confirms the usefulness of the FCI in Asia. Only the indexes of financially advanced economies Japan and Singapore have sufficient forecasting power to predict output growth and inflation, however. Previous literature argues that the FCIs have sufficient forecasting power to predict GDP growth, but less forecasting power for inflation. This paper also suggests that close co-movement of Asian FCIs implies highly similar monetary policies in the region that are strongly linked with monetary policy in the United States.
There has been a series of...