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Forecasting Output Growth And Inflation In The Euro Area: Are Financial Spreads Useful?

Author

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  • Andrea Nobili

    () (Bank of Italy, Economic Research Department)

Abstract

This paper deals with the usefulness of several measures of financial spreads (the slope of the yield curve, the reverse yield gap, the credit quality spread) for fore-casting real economic activity and inflation in the euro area. A quarterly Bayesian vector autoregression model is used to assess the marginal forecasting power of financial spreads for real economic activity and inflation. A benchmark BVAR is set up, containing real GDP, inflation and key indicators of monetary policy and foreign macroeconomic variables. The properties of the spreads as leading indicator are then assessed by augmenting the benchmark BVAR with the spreads, one at a time. We find that financial spreads have no or negligible marginal predictive con-tent for either target variable. Overall, there is no ready-to-use financial indicator that can replace an encompassing multivariate model for the prediction of target variables in the euro area.

Suggested Citation

  • Andrea Nobili, 2005. "Forecasting Output Growth And Inflation In The Euro Area: Are Financial Spreads Useful?," Temi di discussione (Economic working papers) 544, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_544_05
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    References listed on IDEAS

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    Cited by:

    1. Nii Ayi Armah & Norman Swanson, 2011. "Some variables are more worthy than others: new diffusion index evidence on the monitoring of key economic indicators," Applied Financial Economics, Taylor & Francis Journals, vol. 21(1-2), pages 43-60.
    2. Rumler, Fabio & Valderrama, Maria Teresa, 2010. "Comparing the New Keynesian Phillips Curve with time series models to forecast inflation," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 126-144, August.
    3. Jean-Stéphane MESONNIER, 2007. "The predictive content of the real interest rate gap for macroeconomic variables in the euro area," Money Macro and Finance (MMF) Research Group Conference 2006 102, Money Macro and Finance Research Group.
    4. Mésonnier, J-S., 2006. "The Reliability of Macroeconomic Forecasts based on Real Interest Rate Gap Estimates in Real Time: an Assessment for the Euro Area," Working papers 157, Banque de France.
    5. Jean-Stephane Mesonnier, 2011. "The forecasting power of real interest rate gaps: an assessment for the Euro area," Applied Economics, Taylor & Francis Journals, vol. 43(2), pages 153-172.

    More about this item

    Keywords

    financial spreads; bayesian VAR models; bayesian analysis; forecasting;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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