Financial conditions and density forecasts for US Output and inflation
AbstractThe authors reassess the predictive power of financial indicators for output and inflation in the US by studying predictive densities generated by set of linear and nonlinear forecasting models.Â They argue that, if the linkage between financial and real economy is state-dependent as implied by standard models with financial frictions, predictive densities should reveal aspects of the co-movements between financial and macroeconomic variables that are ignored by construction in an ordinary (central) forecasting exercise.Â The authors study the performance of linear and nonlinear (Threshold and Markov-Switching) VARs estimated on a monthly US dataset including various commonly-used financial indicators.Â We obtain three important results.Â First, adding financial indicators to an otherwise standard VAR improves both central forecasts and predictive distributions for output, but the improvement is more substantial for the latter.Â Even inÂ a linear model, financial indicators are more useful in predicting 'tails', or deviations of output and inflation from their expected paths, than 'means', namely the expected paths themselves.Â Second, nonlinear models with financial indicators tend to generate noisier central forecasts than their linear counterparts, but they clearly outperform them in predicting distributions.Â This is mainly because nonlinear models predict the likelihood of recessionary episodes more accurately.Â Third, the discrepancies between models are themselves predictable: a Bayesian forecaster can formulate a reasonable real-time guess on which model is likely to be more accurate in the near future.Â
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centre for Central Banking Studies, Bank of England in its series Joint Research Papers with number 4.
Date of creation: May 2013
Date of revision:
Contact details of provider:
Postal: Threadneedle Street, London, EC2R 8AH
Phone: +44 (020) 7601 4444
Fax: +44 (020) 7601 5460
Web page: http://www.bankofengland.co.uk/education/Pages/ccbs/default.aspx
More information through EDIRC
Financial conditions; density forecasts; US; output; inflation;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-05 (All new papers)
- NEP-CBA-2013-08-05 (Central Banking)
- NEP-FOR-2013-08-05 (Forecasting)
- NEP-MAC-2013-08-05 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Geweke, John & Amisano, Gianni, 2010.
"Comparing and evaluating Bayesian predictive distributions of asset returns,"
International Journal of Forecasting,
Elsevier, vol. 26(2), pages 216-230, April.
- Geweke, John & Amisano, Gianni, 2008. "Comparing and evaluating Bayesian predictive distributions of assets returns," Working Paper Series 0969, European Central Bank.
- James Mitchell & Wallis, K.F., 2008.
"Evaluating Density Forecasts: Forecast Combinations, Model Mixtures, Calibration and Sharpness,"
NIESR Discussion Papers
320, National Institute of Economic and Social Research.
- James Mitchell & Kenneth F. Wallis, 2011. "Evaluating density forecasts: forecast combinations, model mixtures, calibration and sharpness," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(6), pages 1023-1040, 09.
- Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010.
"Large Bayesian vector auto regressions,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
- Domenico Giannone & Martha Banbura & Lucrezia Reichlin, 2008. "Bayesian VARs with large panels," ULB Institutional Repository 2013/13388, ULB -- Universite Libre de Bruxelles.
- Bańbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2008. "Large Bayesian VARs," Working Paper Series 0966, European Central Bank.
- Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES 2008_033, ULB -- Universite Libre de Bruxelles.
- Banbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2007. "Bayesian VARs with Large Panels," CEPR Discussion Papers 6326, C.E.P.R. Discussion Papers.
- Javier Bianchi, 2009.
"Overborrowing and systemic externalities in the business cycle,"
2009-24, Federal Reserve Bank of Atlanta.
- Javier Bianchi, 2011. "Overborrowing and Systemic Externalities in the Business Cycle," American Economic Review, American Economic Association, vol. 101(7), pages 3400-3426, December.
- Bianchi, Javier, 2009. "Overborrowing and Systemic Externalities in the Business Cycle," MPRA Paper 16270, University Library of Munich, Germany.
- Bianchi, Javier, 2009. "Overborrowing and Systemic Externalities in the Business Cycle," MPRA Paper 15114, University Library of Munich, Germany.
- Javier Bianchi, 2010. "Overborrowing and Systemic Externalities in the Business Cycle," 2010 Meeting Papers 96, Society for Economic Dynamics.
- Angus Deaton, 1989.
"Saving and Liquidity Constraints,"
NBER Working Papers
3196, National Bureau of Economic Research, Inc.
- Gianni Amisano & Raffaella Giacomini, 2005.
"Comparing Density Forecsts via Weighted Likelihood Ratio Tests,"
ubs0504, University of Brescia, Department of Economics.
- Amisano, Gianni & Giacomini, Raffaella, 2007. "Comparing Density Forecasts via Weighted Likelihood Ratio Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 177-190, April.
- Raffaella Giacomini & Halbert White, 2006.
"Tests of Conditional Predictive Ability,"
Econometric Society, vol. 74(6), pages 1545-1578, November.
- Giacomini, Raffaella & White, Halbert, 2003. "Tests of Conditional Predictive Ability," University of California at San Diego, Economics Working Paper Series qt5jk0j5jh, Department of Economics, UC San Diego.
- Raffaella Giacomini & Halbert White, 2003. "Tests of conditional predictive ability," Boston College Working Papers in Economics 572, Boston College Department of Economics.
- Raffaella Giacomini & Halbert White, 2003. "Tests of Conditional Predictive Ability," Econometrics 0308001, EconWPA.
- Sydney Ludvigson, 1996.
"Consumption and credit: a model of time-varying liquidity constraints,"
9624, Federal Reserve Bank of New York.
- Sydney Ludvigson, 1999. "Consumption And Credit: A Model Of Time-Varying Liquidity Constraints," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 434-447, August.
- Todd E. Clark, 2011.
"Real-Time Density Forecasts From Bayesian Vector Autoregressions With Stochastic Volatility,"
Journal of Business & Economic Statistics,
Taylor & Francis Journals, vol. 29(3), pages 327-341, July.
- Clark, Todd E., 2011. "Real-Time Density Forecasts From Bayesian Vector Autoregressions With Stochastic Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(3), pages 327-341.
- Filardo, Andrew J. & Gordon, Stephen F., 1998.
"Business cycle durations,"
Journal of Econometrics,
Elsevier, vol. 85(1), pages 99-123, July.
- Kim, Sunghyun Henry & Kollmann, Robert & Kim, Jinill, 2010. "Solving the incomplete market model with aggregate uncertainty using a perturbation method," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 50-58, January.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Marta Bańbura, 2008.
"Large Bayesian VARs,"
2008 Meeting Papers
334, Society for Economic Dynamics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria Brady).
If references are entirely missing, you can add them using this form.