Authors: Andrea Nobili
Publish Date: 2006/09/25
Volume: 33, Issue: 1, Pages: 177-195
Abstract
In the empirical literature there is wide consensus that financial spreads cannot constitute a broadly based assessment on future output growth and inflation because the bivariate estimated regressions are not stable over time and lead to relatively poor outofsample forecasting performance eg J Econ Liter 41788–829 2003 This conclusion arised for the USA as well as for several European countries In this paper we check whether the marginal predictive content of some financial spreads the slope of the yield curve the reverse yield gap and the credit spread for macroeconomic forecasting in the euro area can be recovered using techniques taking into account potential parameters instability We set up a quarterly Bayesian vector autoregression model with timevarying coefficients comprising both target variables as well as other monetary policy indicators to serve as a benchmark Then the properties of the spreads as leading indicators are assessed by augmenting this benchmark BVAR with the spreads one at a time We find time variation of the coefficients to be a relevant issue in our model especially for forecasting output growth but financial spreads continue to have no or negligible marginal predictive content for both output growth and inflation Overall our results confirm that there is no readytouse financial spread that can replace an encompassing multivariate model for the prediction of target variables in the euro area
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