Central Bank of Costa Rica publishes new Dynamic Financial Conditions Index to replace existing financial conditions gauge

The Central Bank of Costa Rica has published a new Dynamic Financial Conditions Index (ICFD), a composite indicator designed to assess whether Costa Rica’s financial conditions are becoming more restrictive or more accommodative. The ICFD will replace the existing Financial Conditions Index (ICF) in the central bank’s official publications, and the ICF will no longer be updated. The index summarises 24 financial variables, including monetary and credit aggregates, deposit and lending interest rates, and indicators from the domestic and international financial system. Interpretation is relative: an increase (decrease) signals conditions are more restrictive (more accommodative) than in the prior period, while positive (negative) values indicate conditions that are more restrictive (more accommodative) than the historical average since 2000. Compared with the ICF, the ICFD adds variables that were previously unavailable or lacked sufficient history and switches from a principal components approach to a dynamic factor method intended to capture persistence and reduce short-term volatility; the central bank also notes that declines in the ICFD show a close temporal correlation with higher GDP growth and inflation in subsequent quarters. The historical series starts in January 2000 and will be published on the central bank’s website with a two-month lag under its Economic Indicators section. The full methodology and an example application are set out in the central bank’s research document “Growth at Risk in Costa Rica: a perspective from a small and open economy”.