Advanced Search
MyIDEAS: Login to save this paper or follow this series

Forecasting Output and Inflation: The Role of Asset Prices

Contents:

Author Info

  • James H. Stock
  • Mark W. Watson

Abstract

This paper examines old and new evidence on the predictive performance of asset prices for inflation and real output growth. We first review the large literature on this topic, focusing on the past dozen years. We then undertake an empirical analysis of quarterly data on up to 38 candidate indicators (mainly asset prices) for seven OECD countries for a span of up to 41 years (1959 1999). The conclusions from the literature review and the empirical analysis are the same. Some asset prices predict either inflation or output growth in some countries in some periods. Which series predicts what, when and where is, however, itself difficult to predict: good forecasting performance by an indicator in one period seems to be unrelated to whether it is a useful predictor in a later period. Intriguingly, forecasts produced by combining these unstable individual forecasts appear to improve reliably upon univariate benchmarks.

Download Info

If 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.
File URL: http://www.nber.org/papers/w8180.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8180.

as in new window
Length:
Date of creation: Mar 2001
Date of revision:
Publication status: published as Proceedings, Federal Reserve Bank of San Francisco meeting, "Asset Prices, Exchange Rates, and Monetary Policy," March 2-3, 2001
Handle: RePEc:nbr:nberwo:8180

Note: EFG ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Gertler, Mark & Lown, Cara S, 1999. "The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 15(3), pages 132-50, Autumn.
  2. Todd E. Clark & Michael W. McCracken, 1999. "Tests of equal forecast accuracy and encompassing for nested models," Research Working Paper, Federal Reserve Bank of Kansas City 99-11, Federal Reserve Bank of Kansas City.
  3. Benjamin M. Friedman & Kenneth N. Kuttner, 1998. "Indicator Properties Of The Paper-Bill Spread: Lessons From Recent Experience," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 34-44, February.
  4. Jushan Bai, 1995. "Estimating Multiple Breaks One at a Time," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 95-18, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Benjamin M. Friedman & Kenneth N. Kuttner, 1991. "Why Does the Paper-Bill Spread Predict Real Economic Activity?," NBER Working Papers 3879, National Bureau of Economic Research, Inc.
  6. Martin Feldstein & James H. Stock, 1994. "The Use of a Monetary Aggregate to Target Nominal GDP," NBER Chapters, in: Monetary Policy, pages 7-69 National Bureau of Economic Research, Inc.
  7. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(1), pages 11-32, Winter.
  8. David G. Barr & John Y. Campbell, 1996. "Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices," NBER Working Papers 5821, National Bureau of Economic Research, Inc.
  9. Sydney Ludvigson & Charles Steindel, 1999. "How important is the stock market effect on consumption?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Jul, pages 29-51.
  10. Lawrence Katz & Alan Krueger, 1999. "The High-pressure U.S. Labor Market of the 1990s," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 795, Princeton University, Department of Economics, Industrial Relations Section..
  11. Bernard, Henri J & Gerlach, Stefan, 1998. "Does the Term Structure Predict Recessions? The International Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1892, C.E.P.R. Discussion Papers.
  12. John V. Duca, 1999. "What credit market indicators tell us," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, Federal Reserve Bank of Dallas, issue Q III, pages 2-13.
  13. John Y. Campbell, 1998. "Asset Prices, Consumption, and the Business Cycle," NBER Working Papers 6485, National Bureau of Economic Research, Inc.
  14. Jeffrey A. Frankel & Cara S. Lown, 1991. "An indicator of future inflation extracted from the steepness of the interest rate yield curve along its entire length," Research Paper, Federal Reserve Bank of New York 9122, Federal Reserve Bank of New York.
  15. Lettau, Martin & Ludvigson, Sydney, 1999. "Consumption, Aggregate Wealth and Expected Stock Returns," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2223, C.E.P.R. Discussion Papers.
  16. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(2), pages 305-333, December.
  17. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(1), pages 133-155, February.
  18. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, Elsevier, vol. 41(7), pages 1375-1401, July.
  19. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  20. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, American Economic Association, vol. 71(4), pages 545-65, September.
  21. Benjamin M. Friedman & Kenneth N. Kuttner, 1993. "Economic Activity and the Short-term Credit Markets: An Analysis of Prices and Quantities," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 193-284.
  22. Michael Dueker, 1997. "Strengthening the case for the yield curve as a predictor of U.S. recessions," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Mar, pages 41-51.
  23. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers, Harvard - J.F. Kennedy School of Government 178d, Harvard - J.F. Kennedy School of Government.
  24. Christopher A. Sims, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," NBER Working Papers 0430, National Bureau of Economic Research, Inc.
  25. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 555-76, June.
  26. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  27. repec:cup:etheor:v:13:y:1997:i:3:p:315-52 is not listed on IDEAS
  28. Ben S. Bernanke, 1990. "On the predictive power of interest rates and interest rate spreads," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Nov, pages 51-68.
  29. Sharon Kozicki, 1997. "Predicting real growth and inflation with the yield spread," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q IV, pages 39-57.
  30. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 529-54, June.
  31. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  32. Snower,Dennis J. & Dehesa,Guillermo de la (ed.), 1997. "Unemployment Policy," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521599214.
  33. James H. Stock & Mark W. Watson, 1994. "Evidence on structural instability in macroeconomic times series relations," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 94-13, Federal Reserve Bank of Chicago.
  34. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  35. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(2), pages 279-304, October.
  36. Stefan Gerlach, 1995. "The information content of the term structure: evidence for Germany," BIS Working Papers 29, Bank for International Settlements.
  37. Joseph G. Haubrich & Ann M. Dombrosky, 1996. "Predicting real growth using the yield curve," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q I, pages 26-35.
  38. Thomas Laubach, 1997. "Measuring the NAIRU : evidence from seven economies," Research Working Paper, Federal Reserve Bank of Kansas City 97-13, Federal Reserve Bank of Kansas City.
  39. Marcellino, Massimiliano & Stock, James H. & Watson, Mark W., 2003. "Macroeconomic forecasting in the Euro area: Country specific versus area-wide information," European Economic Review, Elsevier, Elsevier, vol. 47(1), pages 1-18, February.
  40. Robert J. Gordon, 1981. "Inflation, Flexible Exchange Rates, and the Natural Rate of Unemployment," NBER Working Papers 0708, National Bureau of Economic Research, Inc.
  41. Frankel, Jeffrey A, 1982. "A Technique for Extracting a Measure of Expected Inflation from the Interest Rate Term Structure," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 135-42, February.
  42. King, R.G. & Rebelo, S.T., 1989. "Low Frequency Filtering And Real Business Cycles," RCER Working Papers 205, University of Rochester - Center for Economic Research (RCER).
  43. Michael Dotsey, 1998. "The predictive content of the interest rate term spread for future economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 31-51.
  44. Fama, Eugene F., 1990. "Term-structure forecasts of interest rates, inflation and real returns," Journal of Monetary Economics, Elsevier, Elsevier, vol. 25(1), pages 59-76, January.
  45. Hansen, Bruce E, 1997. "Approximate Asymptotic P Values for Structural-Change Tests," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 15(1), pages 60-67, January.
  46. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 472-92, June.
  47. Philippe Jorion & Frederic Mishkin, 1991. "A Multi-Country Comparison of Term Structure Forecasts at Long Horizons," NBER Working Papers 3574, National Bureau of Economic Research, Inc.
  48. Catherine Bonser-Neal & Timothy R. Morley, 1997. "Does the yield spread predict real economic activity? : a multicountry analysis," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q III, pages 37-53.
  49. Robert D. Laurent, 1988. "An interest rate-based indicator of monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Jan, pages 3-14.
  50. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(1), pages 33-49, Winter.
  51. Stephen G. Cecchetti & Rita S. Chu & Charles Steindel, 2000. "The unreliability of inflation indicators," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 6(Apr).
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8180. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.