Effects of Stock Indices of Developed and Emerging Markets on Economic Activity in Colombia: a FAVAR Approach

We analyze the effect of global financial conditions of developed and emerging economies on economic activity in Colombia. To accomplish this task, we estimate financial conditions indices for the stock markets of developed and emerging countries using principal components analysis. Then, we include the estimated indices as regressors in a traditional vector autoregression (VAR) that includes series of economic activity in Colombia; that is, we carry out a factor-augmented vector autoregression (FAVAR) analysis with one unobservable factor and one observable variable accounting for real economic activity to evaluate the influence of international financial conditions on macroeconomic variables in Colombia. Using monthly data, we find that the stock market conditions of emerging economies have a positive effect on macroeconomic performance in Colombia.