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Have Structural Changes Eliminated the Out-of-Sample Ability of Financial Variables To Forecast Real Activity After the Mid-1980s? Evidence From the Canadian Economy

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Author Info

  • Akhter Faroque

    ()
    (Department of Economics, Laurentian University)

  • William Veloce

    ()
    (Department of Economics, Brock University)

  • Jean-Francois Lamarche

    ()
    (Department of Economics, Brock University)

Abstract

The paper evaluates the reliability of the information content of individual financial variables for Canada’s future output growth. We estimate the timing of structural changes in linear growth models and check robustness to specification changes, multiple breaks, and business cycle asymmetry. Our out-of-sample forecast evaluation using the MSE-F and the ENC-NEW tests show that the leading information content of most financial variables has deteriorated after 1984:4, but the 1-3 year term spread exhibits a consistently reliable predictive ability at the 1 and 2 quarter horizons and has significant forecasting ability at the 8 quarter horizon. Also, the real M1 money growth has regained its ability to forecast output growth since 1991:1.

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File URL: ftp://coffee.econ.brocku.ca/RePec/pdf/0910.pdf
File Function: First version, 2009
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File URL: ftp://coffee.econ.brocku.ca/RePec/pdf/0910r.pdf
File Function: Revised version, 2010
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Bibliographic Info

Paper provided by Brock University, Department of Economics in its series Working Papers with number 0910.

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Length: 35 pages
Date of creation: Dec 2009
Date of revision: Oct 2010
Publication status: Forthcoming in Applied Economics
Handle: RePEc:brk:wpaper:0910

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Keywords: Financial indicators; structural change; nested model forecasts; minimum MSFE; encompassing tests;

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References

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Cited by:
  1. Barbara Rossi, 2011. "Advances in Forecasting Under Instability," Working Papers 11-20, Duke University, Department of Economics.
  2. Lyócsa, Štefan & Výrost, Tomáš & Baumöhl, Eduard, 2012. "Breakdowns and revivals: the long-run relationship between the stock market and real economic activity in the G-7 countries," MPRA Paper 43306, University Library of Munich, Germany.

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