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The Role of Financial Spreads in Macroeconomic Forecasting: Evidence for the UK


  • Sarantis, Nicholas
  • Lin, Sharon X


This paper examines the potential use of financial spreads in forecasting aggregate macroeconomic activity in the United Kingdom. The authors develop a quarterly BVAR (Bayesian vector autoregressive) macroeconomic model which is used to generate out-of-sample forecasts for GDP, prices, real effective exchange rate, interest rate and other macroeconomic variables at varying forecast horizons over the period 1989Q1-1995Q2. The forecasts are generated through sequential reestimation using the Kalman filter. Extensive experimentation is undertaken, using different priors, monetary indicators and financial spreads. The empirical results suggest that financial spreads in the United Kingdom do not contain any predictive information on future real macroeconomic activity, but they yield a significant improvement in price predictions. Copyright 1999 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Sarantis, Nicholas & Lin, Sharon X, 1999. "The Role of Financial Spreads in Macroeconomic Forecasting: Evidence for the UK," Manchester School, University of Manchester, vol. 67(1), pages 89-110, January.
  • Handle: RePEc:bla:manchs:v:67:y:1999:i:1:p:89-110

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    References listed on IDEAS

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    Cited by:

    1. Sarantis, Nicholas, 2006. "On the short-term predictability of exchange rates: A BVAR time-varying parameters approach," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2257-2279, August.
    2. Pami Dua & Nishita Raje, 2010. "Determinants of Weekly Yields on Government Securities in India," Working Papers id:2834, eSocialSciences.
    3. Pami Dua & Nishita Raje & Satyananda Sahoo, 2004. "Interest Rate Modeling and Forecasting in India," Occasional papers 3, Centre for Development Economics, Delhi School of Economics.

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