Financial condition index construction methods and the problems posed for Vietnam in the context of financial integration

Abstract

Domestic Financial Conditions (DFC) is discussed by researchers as well as policy makers, market experts in recent years because it does not only reflect the current economic situation but also market expectations about the future state of the economy. This index is deployed in many countries or regions such as the UK, US, EU, Japan, Finland, South Africa, Asia or at international organizations such as IMF, OECD, aiming to produce a set of indicators to forecast the market, to forecast the growth or recession of the economy. In Vietnam, there is no national financial condition index (FCI) that is constructed and officially published annually, and there are very few studies on the development of a national financial condition index. In terms of global economic and financial integration as today, domestic financial conditions in the world can be strongly affected by global factors and Vietnam is also. This paper reviews two main methods to construct FCI which are weighted-sum approach and principal components analysis, and poses some problems for Vietnam on selecting methods, collecting data, choosing area and variables to build FCI.