Linear and Threshold Forecasts of Output and Inflation with Stock and Housing Prices
AbstractThe authors examine whether simple measures of Canadian equity and housing price misalignments contain leading information about output growth and inflation. Previous authors have found that the information content of asset prices in general, and equity and housing prices in particular, are unreliable in that they do not systematically predict future economic activity or inflation. However, earlier studies relied on simple linear relationships that would fail to pick up the potential non-linear effects of asset-price misalignments. The authors' results suggest that housing prices are useful for predicting GDP growth, even within a linear context. Moreover, both stock and housing prices can improve inflation forecasts, especially when using a threshold specification. These improvements in forecast performance are relative to the information contained in Phillips-curve type indicators for inflation and IS-curve type indicators for GDP growth.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 06-25.
Length: 37 pages
Date of creation: 2006
Date of revision:
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Inflation and prices; Business fluctuations and cycles;
Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-05 (All new papers)
- NEP-ETS-2006-08-05 (Econometric Time Series)
- NEP-FOR-2006-08-05 (Forecasting)
- NEP-MAC-2006-08-05 (Macroeconomics)
- NEP-URE-2006-08-05 (Urban & Real Estate Economics)
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