This paper constructs a broad measure of financial conditions for the United States which suggests
that since the onset of the credit crisis there has been a marked tightening in financial conditions, despite a
substantial easing of policy rates and a depreciation of the dollar. This measure of overall financial
conditions includes interest rate spreads for riskier borrowers and a survey measure of the tightness of bank
lending standards, which have been the main drivers behind the tightening in financial conditions. Indeed,
recent data suggest that the trend deterioration in overall financial conditions has continued into the second
half of 2008. The effect of the tightening in overall financial conditions already experienced may subtract
1¾ per cent from GDP over the next four to six quarters. Not only have financial conditions continued to
worsen, but much of the impact on the real economy has yet to be felt.
