IFIS for the third quarter of 2017: Financial conditions continue to ease although at a milder pace

In the third quarter of 2017 the financial conditions continued to ease although the mitigation trend is less pronounced when compared to the end of the last year and the beginning of this year. Foreign factors, influencing the domestic financial conditions, have mostly influenced the mitigation of the financial conditions. The domestic financial conditions, although accompanied by a mitigation trend, have considerably decelerated their rate. As opposed to the first part of the year when the expansive monetary politics of the Croatian National Bank (CNB) caused an increase of the liquidity of the financial system, which, in turn, mostly affected the improvement of the financial conditions, the third quarter registered―although still at a high level―a somewhat lower level of the daily surplus of liquidity when compared to the first part of the year due to a demand for kuna amidst the peak of the tourist season. This, inter alia, brought on a deceleration of a further mitigation of the financial conditions in the country. On the other hand, macroeconomic indicators still positively affect the domestic financial conditions, especially those related to the status of government finances, which led to a fall in government bond yields and credit default swaps (CDS). As far as foreign variables are concerned, the largest contribution to a further mitigation of financial conditions came from reduced volatility, that is, from reduced risk aversion, which was influenced by geopolitical risks.


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.

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