DOI QR코드

DOI QR Code

The Relationship Between Financial Condition and Business Cycle in Mongolia

  • Received : 2019.03.01
  • Accepted : 2019.05.02
  • Published : 2019.06.30

Abstract

This paper examines the interactions between financial conditions and business cycles in Mongolia, a small open economy, heavily depending on commodity exports. We construct two financial conditions indexes based on the reduced form IS model and the vector autoregression (VAR) model as surveillance tools to quantify the degree of the financial conditions. We find that real short-term interest rate and real effective exchange rate gap get a higher weight in the FCIs. Both business and financial cycles are often more pronounced in Mongolia, and financial condition is dependent of the financial and monetary policies in place. The analysis of the predictive power of the FCIs for business cycles shows that they have predictive information for the near-term economic activities. FCIs are also helpful in signaling inflation turning points.

Keywords

References

  1. Borio, C. 2014. "The Financial Cycle and Macroeconomics: What Have We Learnt?," Journal of Banking & Finance, vol. 45, no. 1, pp. 182-198. https://doi.org/10.1016/j.jbankfin.2013.07.031
  2. Brandao-Marques, L. and E. P. Ruiz. 2017. How Financial Conditions Matter Differently Across Latin America. IMF Working Paper, no. WP/17/218.
  3. Claessens, S., Kose, M. A. and M. E. Terrones. 2012. "How Do Business and Financial Cycles Interact?," Journal of International Economics, vol. 87, no. 1, pp. 178-190. https://doi.org/10.1016/j.jinteco.2011.11.008
  4. Doojav, G.-O. and D. Luvsannyam. 2019. "External Shocks and Business Cycle Fluctuations in Mongolia: Evidence from a Large Bayesian VAR," International Economic Journal, vol. 33, no.1, pp. 42-64. https://doi.org/10.1080/10168737.2019.1570301
  5. Gauthier, C., Graham, C. and Y. Liu. 2004. Financial Conditions Indexes for Canada. Bank of Canada Working Paper, no. 2004-22.
  6. Gomes, F. A. R. and L. S. Paz. 2005. "Can Real Exchange Rate Devaluation Improve the Trade Balance? The 1990-1998 Brazilian Case," Applied Economics Letters, vol. 12, no. 9, pp. 525-528. https://doi.org/10.1080/13504850500076908
  7. Gomez, E., Murcia, A. and N. Zamudio. 2011. "Financial Condition Index: Early and Leading Indicator for Columbia?," Essays on Economic Policy-ESPE, vol. 29, no. 66, pp. 176-220.
  8. Gonzalez, A., Hamann, F. and D. Rodriguez. 2015. Macroprudential Policies in a Commodity Exporting Economy. BIS Working Papers, no. 506.
  9. Goodhart, C. and B. Hofmann. 2001. Asset Prices, Financial Conditions, and the Transmission of Monetary Policy. Paper Presented in the Conference on "Asset Prices, Exchange Rates, and Monetary Policy," Stanford University, March 2-3, 2001.
  10. Gumata, N., Klein, N. and E. Ndou. 2012. A Financial Conditions Indexes for South Africa. IMF Working Paper, no. 12/196.
  11. Hatzius, J., Hooper, P., Mishkin, F. S. M., Schoenholtz, K. L. and M. Watson. 2010. Financial Conditions Indexes: A Fresh Look After the Financial Crisis. NBER Working Paper, no. 16150.
  12. Ho, G. and Y. Lu. 2013. A Financial Conditions Index for Poland. IMF Working Paper, no. 13/252.
  13. Johansen, S. and K. Juselius. 1990. "Maximum Likelihood Estimation and Inference on Cointegration - With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, vol. 52, no. 2, pp. 169-210. https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x
  14. Khundrakpam, J., Kavediya, R. and J. M. Anthony. 2017. "Estimating Financial Conditions Index for India," Journal of Emerging Market Finance, vol. 16, no. 1, pp. 61-89. https://doi.org/10.1177/0972652716686273
  15. Lack, C. 2003. A Financial Conditions Index for Switzerland. BIS Papers, no. 19. pp. 398-414.
  16. Li, B. G., Gupta, P. and J. Yu. 2017. "From Natural Resource Boom to Sustainable Economic Growth: Lessons for Mongolia," International Economics, vol. 151, pp. 7-25. https://doi.org/10.1016/j.inteco.2017.03.001
  17. Maino, R., Imam, P. A. and Y. Ojima. 2013. Macroprudential Policies for a Resource Rich Economy: The Case of Mongolia. IMF Working Paper, no. 13/18.
  18. Matheson, T. 2011. Financial Conditions Indexes for the United States and Euro Area. IMF Working Paper, no. 11/93.
  19. Mayes, D. G. and M. Viren. 2001. Financial Conditions Indexes. Bank of Finland Discussion Paper, no. 2001-17.
  20. Osorio, C., Pongsaparan, R. and D. F. Unsal. 2011. A Quantitative Assessment of Financial Conditions in Asia. IMF Working Paper, no. 11/170.
  21. Zheng, G. and W. Yu. 2014. "Financial Conditions Index's Construction and its Application on Financial Monitoring and Economic Forecasting," Procedia Computer Science, vol. 31, pp. 32-39. https://doi.org/10.1016/j.procs.2014.05.242