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Are financial indicators capable of predicting economic activity?

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  • Viktor Kotlán

Abstract

The paper argues that the prices of financial instruments contain usefulinformation about the development of different macroeconomic variables. Itsfocus lies in examining the ability of stock prices and of spread betweenlong and shor interest rates to predict real economic activity. We firstoutline the theory behind this argument and present the findings ofavailable empirical literature on the topic. The main part of the paper isdevoted to empirical analysis of the relationship between the mentionedindicators and real economic activity in the Czech Republic using VARapproach. The results stemming from Granger causality tests and variancedecomposition suggest that the only indicator of the three we examined (twospreads, stock index) capable of predicting real economic activity is thespread between the yield on 5-year bond and one-month PRIBOR.

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Bibliographic Info

Article provided by University of Economics, Prague in its journal Politická ekonomie.

Volume (Year): 1999 (1999)
Issue (Month): 5 ()
Pages:

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Handle: RePEc:prg:jnlpol:v:1999:y:1999:i:5:id:68

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Related research

Keywords: financial indicators; real economic acitvity; term structure of interest rates; stock prices; forecasting; vector autoregression;

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Cited by:
  1. Milan Šimáček, 2012. "Financial Stress Indexes for the Czech Republic and Hungary," Politická ekonomie, University of Economics, Prague, vol. 2012(5), pages 614-634.
  2. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, EconWPA.

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