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Financial variables as leading indicators of GDP growth: Evidence from a MIDAS approach during the Great Recession

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  • Laurent Ferrara
  • Clément Marsilli

Abstract

The global economic recession, referred to as the Great Recession, endured by the main industrialized countries during the period 2008--09, in the wake of the financial and banking crises, has pointed out the current importance of the financial sector in macroeconomics. In this article, we evaluate the predictive power of some major financial variables to anticipate GDP growth in euro area countries during this specific period of time. In this respect, we implement a Mixed Data Sampling (MIDAS)-based modelling approach, put forward by Ghysels et al. (2007), that enables to forecast quarterly Gross Domestic Product (GDP) growth rates using exogenous variables sampled at higher frequencies. Empirical results show that, overall, stock prices help to improve the accuracy of GDP forecasts by comparison with a standard opinion survey variable, whereas oil prices and term spread appear to be less informative. The views expressed herein are those of the authors and do not necessarily reflect those of the Banque de France.

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File URL: http://hdl.handle.net/10.1080/13504851.2012.689099
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 20 (2013)
Issue (Month): 3 (February)
Pages: 233-237

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Handle: RePEc:taf:apeclt:v:20:y:2013:i:3:p:233-237

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References

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  1. Roger E.A. Farmer, 2011. "The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence," NBER Working Papers 17479, National Bureau of Economic Research, Inc.
  2. Laurent Ferrara, 2007. "Point and interval nowcasts of the Euro area IPI," Applied Economics Letters, Taylor & Francis Journals, vol. 14(2), pages 115-120.
  3. Rudebusch, Glenn D. & Williams, John C., 2009. "Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 492-503.
  4. Eric Ghysels & Arthur Sinko & Rossen Valkanov, 2007. "MIDAS Regressions: Further Results and New Directions," Econometric Reviews, Taylor & Francis Journals, vol. 26(1), pages 53-90.
  5. Clements, Michael P & Galvão, Ana Beatriz, 2008. "Macroeconomic Forecasting With Mixed-Frequency Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 546-554.
  6. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
  7. Duarte, Agustin & Venetis, Ioannis A. & Paya, Ivan, 2005. "Predicting real growth and the probability of recession in the Euro area using the yield spread," International Journal of Forecasting, Elsevier, vol. 21(2), pages 261-277.
  8. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  9. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  10. Marcellino, Massimiliano & Schumacher, Christian, 2008. "Factor-MIDAS for now- and forecasting with ragged-edge data: A model comparison for German GDP," CEPR Discussion Papers 6708, C.E.P.R. Discussion Papers.
  11. Mourougane, Annabelle & Roma, Moreno, 2002. "Can confidence indicators be useful to predict short term real GDP growth?," Working Paper Series 0133, European Central Bank.
  12. Bellégo, C. & Ferrara, L., 2009. "Forecasting Euro-area recessions using time-varying binary response models for financial," Working papers 259, Banque de France.
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Cited by:
  1. Laurent Ferrara & Clément Marsilli & Juan-Pablo Ortega, 2013. "Forecasting US growth during the Great Recession: Is the financial volatility the missing ingredient?," EconomiX Working Papers 2013-19, University of Paris West - Nanterre la Défense, EconomiX.
  2. Athanassios Petralias & Sotirios Petros & Pródromos Prodromídis, 2013. "Greece in Recession: Economic predictions, mispredictions and policy implications," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 75, Hellenic Observatory, LSE.
  3. Ferrara, Laurent & Marsilli, Clément & Ortega, Juan-Pablo, 2014. "Forecasting growth during the Great Recession: is financial volatility the missing ingredient?," Economic Modelling, Elsevier, vol. 36(C), pages 44-50.

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