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The Role of Financial Spreads in Macroeconomic Forecasting: Evidence for the UK

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  • Nicholas Sarantis
  • Sharon X. Lin

Abstract

We examine the potential use of financial spreads in forecasting aggregate macroeconomic activity in the UK. We develop a quarterly Bayesian vector autoregressive macroeconomic model which is used to generate out‐of‐sample forecasts for GDP, prices, real effective exchange rate, interest rate and other macroeconomic variables at varying forecast horizons over the period 1989Q1–1995Q2. The forecasts are generated through sequential re‐estimation using the Kalman filter. Extensive experimentation is undertaken, using different priors, monetary indicators and financial spreads. The empirical results suggest that financial spreads in the UK do not contain any predictive information on future real macroeconomic activity, but they yield a significant improvement in price predictions.

Suggested Citation

  • Nicholas Sarantis & Sharon X. Lin, 1999. "The Role of Financial Spreads in Macroeconomic Forecasting: Evidence for the UK," Manchester School, University of Manchester, vol. 67(1), pages 89-110, January.
    • Handle: RePEc:bla:manchs:v:67:y:1999:i:1:p:89-110
    DOI: 10.1111/1467-9957.00134
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    Cited by:

    1. Pami Dua & Nishita Raje, 2023. "Determinants of Yields on Government Securities in India," Springer Books, in: Pami Dua (ed.), Macroeconometric Methods, chapter 0, pages 73-96, Springer.
    2. Wh Boshoff, 2005. "The Properties Of Cycles In South African Financial Variables And Their Relation To The Business Cycle," South African Journal of Economics, Economic Society of South Africa, vol. 73(4), pages 694-709, December.
    3. Pami Dua & Nishita Raje & Satyananda Sahoo, 2004. "Interest Rate Modeling and Forecasting in India," Occasional papers 3, Centre for Development Economics, Delhi School of Economics.
    4. Pami Dua & Nishita Raje, 2010. "Determinants of Weekly Yields on Government Securities in India," Working papers 187, Centre for Development Economics, Delhi School of Economics.
    5. Sarantis, Nicholas, 2006. "On the short-term predictability of exchange rates: A BVAR time-varying parameters approach," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2257-2279, August.
    6. Pami Dua & Nishita Raje & Satyananda Sahoo, 2008. "Forecasting Interest Rates in India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 2(1), pages 1-41, March.

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