The effect of financial condition index on macroeconomic variables in Iran: TVP-FAVAR approach

In recent years, the financial condition index (FCI) has been used in many countries as an important index to determine the state of macroeconomic policies. For this purpose, in the present study, the effects of financial condition index on macroeconomic variables were investigated by applying the time-varying parameter factor-augmented vector autoregressive model (TVP-FAVAR) and using quarterly data during the period (1991-2019). The results indicate that the response type and response rate of macroeconomic variables were different due to the financial condition index shock over time, and this indicates the necessity of employing the parameter - variable approach. According to the obtained results , The unemployment rate and economic growth rate variables in the short and long term showed a Negative and positive response to behavioral changes in the financial condition index variable, respectively; The effects of the financial Conditions Index shock on the inflation rate variable appear after one period; However, the response of this variable to the financial condition index shock in the short and long term has been different according to the conditions prevailing on the economy of the country . Also, the financial conditions index shock in the short run has improved the Gini coefficient variable, but in the long run, especially in the late 2010s has rised the income gap. The response of the budget deficit variable to the financial condition index shock in the whole period under review was positive and the financial condition index shock has increased the government budget deficit.