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The impact of structural breaks on the stability of the out-of-sample predictive content of financial variables for Canada's real GDP growth: An encompassing approach

  • Akhter Faroque

    ()

    (Department of Economics, Laurentian University)

  • William Veloce

    ()

    (Department of Economics, Brock University)

  • Jean-Francois Lamarche

    ()

    (Department of Economics, Brock University)

This paper investigates the timing, frequency and the impact of structural breaks on the stability of the predictive content of a large number of financial variables for Canada's output growth. The forecasts are evaluated over two identified out-of-sample regimes using both the equal accuracy and encompassing tests. The results have enabled us to classify all variables into four useful groups. Two of Canada's term spreads near the short-end of the yield curve belong to the group that exhibits strong and stable predictive content at long horizons that are most relevant to monetary policy providing an indication that the Bank of Canada should not discard these spreads from its list of closely watched information variable.

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Paper provided by Brock University, Department of Economics in its series Working Papers with number 0803.

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Length: 37 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:brk:wpaper:0803
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  1. Charles A. E. Goodhart & Boris Hofmann, 2001. "Asset prices, financial conditions and the transmission of monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  2. Glenn D. Rudebusch & John C. Williams, 2007. "Forecasting recessions: the puzzle of the enduring power of the yield curve," Working Paper Series 2007-16, Federal Reserve Bank of San Francisco.
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  6. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  7. Campbell R. Harvey, 1997. "The Relation between the Term Structure of Interest Rates and Canadian Economic Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 169-93, February.
  8. Ramdane Djoudad & Jack Selody & Carolyn Wilkins, 2005. "Does Financial Structure Matter for the Information Content of Financial Indicators?," Staff Working Papers 05-33, Bank of Canada.
  9. James H. Stock & Mark W. Watson, 1994. "Evidence on structural instability in macroeconomic times series relations," Working Paper Series, Macroeconomic Issues 94-13, Federal Reserve Bank of Chicago.
  10. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 39-61, February.
  11. James H. Stock & Mark W. Watson, 2001. "Forecasting Output and Inflation: The Role of Asset Prices," NBER Working Papers 8180, National Bureau of Economic Research, Inc.
  12. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  13. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 254-59, April.
  14. Pierre L. Siklos & Andrew G. Barton, 2001. "Monetary aggregates as indicators of economic activity in Canada: empirical evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 1-17, February.
  15. Christis Hassapis, 2003. "Financial variables and real activity in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 421-442, May.
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