IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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

  • Andrea Nobili

    ()

    (Bank of Italy, Economic Research Department)

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2005/2005-0544/tema_544.pdf
Download Restriction: no

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 544.

as
in new window

Length:
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:bdi:wptemi:td_544_05
Contact details of provider: Postal: Via Nazionale, 91 - 00184 Roma
Web page: http://www.bancaditalia.it

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Gerlach, Stefan, 1997. "The Information Content of the Term Structure: Evidence for Germany," Empirical Economics, Springer, vol. 22(2), pages 161-79.
  2. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
  3. Lang, William W. & Nakamura, Leonard I., 1995. "'Flight to quality' in banking and economic activity," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 145-164, August.
  4. Smets, Frank & Tsatsaronis, Kostas, 1997. "Why Does the Yield Curve Predict Economic Activity? Dissecting the Evidence for Germany and the United States," CEPR Discussion Papers 1758, C.E.P.R. Discussion Papers.
  5. Davis, E Philip & Fagan, Gabriel, 1997. "Are Financial Spreads Useful Indicators of Future Inflation and Output Growth in EU Countries?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 701-14, Nov.-Dec..
  6. Alan S. Blinder, 1985. "Credit Rationing and Effective Supply Failures," NBER Working Papers 1619, National Bureau of Economic Research, Inc.
  7. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
  8. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers 94-24, C.V. Starr Center for Applied Economics, New York University.
  9. Agresti, Anna Maria & Mojon, Benoît, 2001. "Some stylised facts on the euro area business cycle," Working Paper Series 0095, European Central Bank.
  10. Marc Hallin & Mario Forni & Marco Lippi & Lucrezia Reichlin, 2003. "Do financial variables help forecasting inflation and real activity in the Euro area ?," ULB Institutional Repository 2013/2123, ULB -- Universite Libre de Bruxelles.
  11. Canova, Fabio, 2002. "G-7 Inflation Forecasts," CEPR Discussion Papers 3283, C.E.P.R. Discussion Papers.
  12. Michael Dotsey, 1998. "The predictive content of the interest rate term spread for future economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 31-51.
  13. Mishkin, F.S., 1988. "What Does The Term Structure Tell Us About Future Inflation?," Papers fb-_88-29, Columbia - Graduate School of Business.
  14. Cristadoro, Riccardo & Forni, Mario & Reichlin, Lucrezia & Veronese, Giovanni, 2001. "A Core Inflation Index for the Euro Area," CEPR Discussion Papers 3097, C.E.P.R. Discussion Papers.
  15. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
  16. Mark Gertler & R. Glenn Hubbard, 1988. "Financial factors in business fluctuations," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 33-78.
  17. Mishkin, Frederic S., 1991. "A multi-country study of the information in the shorter maturity term structure about future inflation," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 2-22, March.
  18. Benjamin M. Friedman & Kenneth N. Kuttner, 1991. "Why Does the Paper-Bill Spread Predict Real Economic Activity?," NBER Working Papers 3879, National Bureau of Economic Research, Inc.
  19. James H. Stock & Mark W. Watson, 2001. "Forecasting output and inflation: the role of asset prices," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  20. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  21. Ben Bernanke, 1990. "On the Predictive Power of Interest Rates and Interest Rate Spreads," NBER Working Papers 3486, National Bureau of Economic Research, Inc.
  22. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
  23. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  24. Luis J. Álvarez & Fernando C. Ballabriga, 1994. "BVAR models in the context of cointegration: A Monte Carlo experiment," Banco de Espa�a Working Papers 9405, Banco de Espa�a.
  25. Joseph G. Haubrich & Ann M. Dombrosky, 1996. "Predicting real growth using the yield curve," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 26-35.
  26. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  27. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
  28. Catherine Bonser-Neal & Timothy R. Morley, 1997. "Does the yield spread predict real economic activity? : a multicountry analysis," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 37-53.
  29. Philippe Jorion & Frederic Mishkin, 1991. "A Multi-Country Comparison of Term Structure Forecasts at Long Horizons," NBER Working Papers 3574, National Bureau of Economic Research, Inc.
  30. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  31. E. P. Davis & S. G. B. Henry, 1994. "The Use of Financial Spreads As Indicator Variables: Evidence for the U.K. and Germany," IMF Working Papers 94/31, International Monetary Fund.
  32. Davis, E Philip & Henry, S G B & Pesaran, B, 1994. "The Role of Financial Spreads: Empirical Analysis of Spreads and Real Activity," The Manchester School of Economic & Social Studies, University of Manchester, vol. 62(4), pages 374-94, December.
  33. Kydland, Finn E. & Prescott, Edward C., 1988. "The workweek of capital and its cyclical implications," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 343-360.
  34. Frederic S. Mishkin, 1991. "A Multi-Country Study of the Information in the Term Structure about Future Inflation," NBER Working Papers 3125, National Bureau of Economic Research, Inc.
  35. Litterman, Robert, 1986. "Forecasting with Bayesian vector autoregressions -- Five years of experience : Robert B. Litterman, Journal of Business and Economic Statistics 4 (1986) 25-38," International Journal of Forecasting, Elsevier, vol. 2(4), pages 497-498.
  36. Sharon Kozicki, 1997. "Predicting real growth and inflation with the yield spread," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 39-57.
  37. van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 0011, European Central Bank.
  38. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
  39. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_544_05. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.