In macroeconomics, a monetary conditions index (MCI) is an index number calculated from a linear combination of a small number of economy-wide financial variables deemed relevant for monetary policy.
[1] An MCI may also serve as a day-to-day operating target for the conduct of monetary policy, especially in small open economies.
Moreover, monetary policy is assumed to have a significant effect on these variables, especially in the short run.
Hence a linear combination of these variables can measure the effect of monetary policy on aggregate demand.
The MCI is then defined as: Hence MCIt is a weighted sum of the changes between periods 0 and t in the real interest and exchange rates.