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Linear and threshold forecasts of output and inflation using stock and housing prices

  • Greg Tkacz

    (Bank of Canada, 234 Wellington Street, Ottawa, Ontario, Canada K1A 0G9)

  • Carolyn Wilkins

    (Bank of Canada, 234 Wellington Street, Ottawa, Ontario, Canada K1A 0G9)

This study examines whether simple measures of Canadian equity and housing price misalignments contain leading information about output growth and inflation. Previous authors have generally 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 nonlinear effects of asset price misalignments. Our results suggest that housing prices are useful for predicting GDP growth, even within a linear context. Meanwhile, 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. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1046
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 27 (2008)
Issue (Month): 2 ()
Pages: 131-151

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Handle: RePEc:jof:jforec:v:27:y:2008:i:2:p:131-151
DOI: 10.1002/for.1046
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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  18. DETKEN Carsten & SMETS Frank, . "Asset Price Booms and Monetary Policy," EcoMod2003 330700042, EcoMod.
  19. Tkacz, Greg, 2001. "Neural network forecasting of Canadian GDP growth," International Journal of Forecasting, Elsevier, vol. 17(1), pages 57-69.
  20. Coletti, D. & Hunt, B. & Rose, D. & Tetlow, R., 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3 , the Dynamic Model : QPM," Technical Reports 75, Bank of Canada.
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