OECD Economics Department Working Papers
Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.
- ISSN: 18151973 (online)
- https://doi.org/10.1787/18151973
Quantifying the Effect of Financial Conditions on US Activity
This paper constructs a broad measure of financial conditions for the United States which suggests
that since the onset of the credit crisis there has been a marked tightening in financial conditions, despite a
substantial easing of policy rates and a depreciation of the dollar. This measure of overall financial
conditions includes interest rate spreads for riskier borrowers and a survey measure of the tightness of bank
lending standards, which have been the main drivers behind the tightening in financial conditions. Indeed,
recent data suggest that the trend deterioration in overall financial conditions has continued into the second
half of 2008. The effect of the tightening in overall financial conditions already experienced may subtract
1¾ per cent from GDP over the next four to six quarters. Not only have financial conditions continued to
worsen, but much of the impact on the real economy has yet to be felt.
Keywords: macro-financial linkages, financial conditions index, interest rate spreads, credit crunch, credit channel
JEL:
E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy;
E51: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit / Money Supply; Credit; Money Multipliers;
E47: Macroeconomics and Monetary Economics / Money and Interest Rates / Money and Interest Rates: Forecasting and Simulation: Models and Applications;
E32: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Business Fluctuations; Cycles
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