Forecasting the Trend of Macroeconomic Variables in Terms of Financial Conditions Index in Iran: TVP-FAVAR Approach

Abs tractDue to the forward-looking nature of economic decisions, forecas ting the trend of macroeconomic variables has a fundamental role in economic planning and policies.For this purpose, the present s tudy attempts to extract the financial conditions index for the period 1991-2019, then the movement trend of macroeconomic variables has been forecas ted using the Time-Varying Parameter Factor-Augmented Vector Auto-Regressive (TVP-FAVAR).The results show that the financial conditions index has undergone significant changes in recent years, especially in the 2010s, which has had an effective role in the fluctuations of other markets due to the influence and change in the behavior of other macroeconomic variables.Furthermore, forecas ting the trend of macroeconomic variables also indicates that this trend is uns table; in other words, ins tability in the trend of macroeconomic variables is evident and we cannot expect a positive outlook for the above variables.