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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.

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

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Date of creation: Feb 2005
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Handle: RePEc:bdi:wptemi:td_544_05
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