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Linear and Threshold Forecasts of Output and Inflation with Stock and Housing Prices

Author Info

Listed author(s):
  • Greg Tkacz
  • Carolyn Wilkins

Abstract

The authors examine whether simple measures of Canadian equity and housing price misalignments contain leading information about output growth and inflation. Previous authors have 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 non-linear effects of asset-price misalignments. The authors' results suggest that housing prices are useful for predicting GDP growth, even within a linear context. Moreover, 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.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-25.pdf
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Paper provided by Bank of Canada in its series Staff Working Papers with number 06-25.

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Length: 37 pages
Date of creation: 2006
Handle: RePEc:bca:bocawp:06-25
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Web page: http://www.bank-banque-canada.ca/

Keywords: Inflation and prices; Business fluctuations and cycles;

Find related papers by JEL classification:

  • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
  • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

This paper has been announced in the following NEP Reports:

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Cited by:

  1. Jason Allen & Robert Amano & David P. Byrne & Allan W. Gregory, 2009. "Canadian city housing prices and urban market segmentation," Canadian Journal of Economics, Canadian Economics Association, vol. 42(3), pages 1132-1149, August.
  2. Weida Kuang & Peng Liu, 2015. "Inflation and House Prices: Theory and Evidence from 35 Major Cities in China," International Real Estate Review, Asian Real Estate Society, vol. 18(2), pages 217-240.

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