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The information content of financial aggregates in Australia

  • Ellis W. Tallman
  • Naveen Chandra

This paper examines whether financial aggregates provide information useful for predicting the subsequent behavior of real output and inflation. We employ vector autoregression (VAR) techniques to summarize the information in the data, providing evidence on the incremental forecasting value of financial aggregates for forecasting real output and inflation. The in-sample results suggest that there are only a few situations in which knowledge of the aggregates helps forecast real output and inflation. We then test the forecast performance of the VAR systems for two years out-of-sample in order to mimic more closely the real-time forecasting problem faced by policymakers. We compare the out-of-sample forecast accuracy of VAR systems including a financial aggregate with the corresponding system excluding the financial aggregate. Overall, both in-sample and out-of-sample results suggest no robust finding of exploitable information that is useful for policymakers in any of the financial aggregates under examination.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 96-14.

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Date of creation: 1996
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Handle: RePEc:fip:fedawp:96-14
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  1. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report 107, Federal Reserve Bank of Minneapolis.
  2. Trevor, R G & Thorp, S J, 1988. "VAR Forecasting Models of the Australian Economy: A Preliminary Analysis," Australian Economic Papers, Wiley Blackwell, vol. 27(0), pages 108-20, Supplemen.
  3. Orden, David & Fisher, Lance A, 1993. "Financial Deregulation and the Dynamics of Money, Prices, and Output in New Zealand and Australia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 273-92, May.
  4. Stephen G. Cecchetti, 1995. "Inflation Indicators and Inflation Policy," NBER Working Papers 5161, National Bureau of Economic Research, Inc.
  5. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-42, October.
  6. Gordon de Brouwer & Neil R. Ericsson, 1995. "Modelling inflation in Australia," International Finance Discussion Papers 530, Board of Governors of the Federal Reserve System (U.S.).
  7. Mark A. Thoma & Jo Anna Gray, 1994. "On leading indicators: getting it straight," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  8. Benjamin M. Friedman, 1996. "The Rise and Fall of Money Growth Targets as Guidelines for U.S. Monetary Policy," NBER Working Papers 5465, National Bureau of Economic Research, Inc.
  9. Stock, James H. & Watson, Mark W., 1989. "Interpreting the evidence on money-income causality," Journal of Econometrics, Elsevier, vol. 40(1), pages 161-181, January.
  10. Michael Coelli & Jerome Fahrer, 1992. "Indicators of Inflationary Pressure," RBA Research Discussion Papers rdp9207, Reserve Bank of Australia.
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