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What do asset prices tell us about the future?

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  • Stephen D. Smith
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    Abstract

    It is fairly obvious that in market-based economies prices act as a constraint on individual behavior, providing a means by which goods and services flow to those most willing and able to pay for them. But prices play an additional role in the economy-that of signaling the present and expected future state of affairs. Having accurate forecast information is particularly important to policymakers, who are concerned with acting in advance to avoid bad economic outcomes rather than simply reacting to events. ; This article reviews the theoretical literature regarding the extent to which asset prices aggregate information and examines evidence on the ability of financial asset prices to forecast inflation, real output or consumption, and recessions. Given the available evidence, the author finds it difficult to argue that monetary policymakers should give more weight to financial market variables. What can be argued is that, according to theory, financial asset prices should aggregate at least some information about future performance of economically important variables. ; The author concludes that more work is needed along both theoretical and statistical lines for collectively figuring out what role, if any, financial asset prices or yields should play in forecasts used in conducting policy. Meanwhile, these variables will remain at most a source of information that policymakers can choose to use as a supplement to more traditional indicators.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

    Volume (Year): (1999)
    Issue (Month): Q3 ()
    Pages: 4-13

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    Handle: RePEc:fip:fedaer:y:1999:i:q3:p:4-13:n:v.84no.3

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    Related research

    Keywords: Asset pricing ; Inflation (Finance) ; Forecasting;

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    Cited by:
    1. Greg Tkacz & Carolyn Wilkins, 2006. "Linear and Threshold Forecasts of Output and Inflation with Stock and Housing Prices," Working Papers 06-25, Bank of Canada.
    2. Ekaterini Panopoulou & Nikitas Pittis & Sarantis Kalyvitis, 2010. "Looking far in the past: revisiting the growth-returns nexus with non-parametric tests," Empirical Economics, Springer, vol. 38(3), pages 743-766, June.
    3. Ramdane Djoudad & Jack Selody & Carolyn Wilkins, 2005. "Does Financial Structure Matter for the Information Content of Financial Indicators?," Working Papers 05-33, Bank of Canada.
    4. Hassapis, Christis & Kalyvitis, Sarantis, 2002. "Investigating the links between growth and real stock price changes with empirical evidence from the G-7 economies," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 543-575.
    5. Sara G. Castellanos & Eduardo Camero, 2003. "La estructura temporal de tasas de interés en México: ¿Puede predecir la actividad económica futura?," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 18(2), pages 33-66, December.

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