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Financial conditions and density forecasts for US output and inflation

Author

Listed:
  • Piergiorgio Alessandri

    (Banca d'Italia)

  • Haroon Mumtaz

    (Queen Mary University of London)

Abstract

If the links between credit markets and real economy tighten in a crisis, financial indicators might be particularly useful in forecasting the macroeconomic outcomes associated with episodes of financial distress. We examine this conjecture by using a range of linear and nonlinear VAR models to generate predictive distributions for US inflation and industrial production growth. Financial variables display significant predictive power over the Great Recession period, particularly if used within a threshold model that captures the structural break associated to the crisis. However, the Great Recession is unique: financial information and thresholds make little difference for forecasting prior to 2008. (Copyright: Elsevier)

Suggested Citation

  • Piergiorgio Alessandri & Haroon Mumtaz, 2017. "Financial conditions and density forecasts for US output and inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 66-78, March.
  • Handle: RePEc:red:issued:14-103
    DOI: 10.1016/j.red.2017.01.003
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    More about this item

    Keywords

    Forecasting; Financial crises; Great recession; Threshold VAR; Stochastic volatility;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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