Estimation of a Financial Conditions Index for Peru

A Financial Conditions Index (FCI) is estimated for the Peruvian economy for the period from 2004 to 2018. To do so, we use the methodology proposed by Koop and Korobilis (2014), which employs a factor-augmented VAR model with time-varying parameters (TVP-FAVAR). Thus, this methodology produces an indicator that captures all variables relevant to the financial system and, given its flexibility, also allows the contributions of the variables included in the model to change over the course of the sample period. Using this ICF, the interrelationship between the real and financial sectors in the Peruvian economy is quantified; in particular, the reaction of the estimated index to various macroeconomic shocks is assessed, and its co-movement with GDP growth is also examined. Subsequently, the historical structural decomposition of this index is presented. Future research will focus on evaluating the predictive power of this ICF and its potential to serve as an early warning mechanism (Gómez et al., 2011).