IFIS index for the first quarter of 2018: Continuing mitigation of financial conditions, albeit at a significantly slower rate

In the first quarter of 2018 financial conditions continued to mitigate, although the mitigation trend is substantially less pronounced when compared with the end of last year. The mitigation of financial conditions was mostly affected by domestic factors, while foreign financial conditions experienced strong exacerbation. The greatest contribution toward the exacerbation of foreign financial conditions came from a strong rise in volatility, that is, from increased risk aversion and a decline in the value of shares in Europe affected by expectations concerning the rising inflation in the US, but also in the euro zone. Apart from that, the exacerbation of financial conditions was also affected by a strong increase in government bond yields due to favorable economic developments in the euro zone and positive expectations concerning economic growth. At the same time, no spillover from exacerbated foreign financial conditions was registered on the domestic market. Further mitigation of the financial conditions’ domestic component was mostly affected by the exceptional growth of surplus liquidity and a decrease in government bond yields and credit default swaps (CDS) following positive trends concerning government finances indicators and consequential credit rating upgrades. 

 

What is IFIS? 

IFIS is a monthly financial conditions index developed by the Institute of Economics, Zagreb. It provides timely information on the average financial conditions in the economy which can serve as a significant determinant of projections and, consequently, of future economic activity. Financial conditions estimates can be useful for economic activity projections, macroeconomic policy evaluation and financial investment decisions.    
 

How is IFIS calculated?

Overall financial conditions are influenced by a number of variables. The variables are selected so as to reflect changes in the local and international financial environment, taking into consideration the specific features of the local market. To be able to estimate the developments in financial conditions based on the large clusters of variables, it is necessary to extract data from various parts of the financial system into a simple and easily understandable index. The IFIS index is calculated as the pondered average of variables that represent the fluctuations in the financial system, using the frequently applied method of principal components analysis. IFIS is standardized so that its arithmetic mean equals zero (which is the average index value in the entire observed period), while the standard deviation equals one. Positive values represent harsher financial conditions than the average, and negative ones represent milder financial conditions compared to the average. An increase in the index indicates harshening financial conditions, while a decrease indicates milder financial conditions.

The development of the IFIS index was supported by the EIZ Club, Agrokor, Atlantic and Privredna banka Zagreb.