Linear and Threshold Forecasts of Output and Inflation with Stock and Housing Prices

Greg Tkacz () and Carolyn Wilkins

Staff Working Papers from Bank of Canada

Abstract: The authors examine whether simple measures of Canadian equity and housing price misalignments contain leading information about output growth and inflation. Previous authors have found that the information content of asset prices in general, and equity and housing prices in particular, are unreliable in that they do not systematically predict future economic activity or inflation. However, earlier studies relied on simple linear relationships that would fail to pick up the potential non-linear effects of asset-price misalignments. The authors' results suggest that housing prices are useful for predicting GDP growth, even within a linear context. Moreover, both stock and housing prices can improve inflation forecasts, especially when using a threshold specification. These improvements in forecast performance are relative to the information contained in Phillips-curve type indicators for inflation and IS-curve type indicators for GDP growth.

Keywords: Inflation and prices; Business fluctuations and cycles (search for similar items in EconPapers)
JEL-codes: C53 E4 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2006
New Economics Papers: this item is included in nep-ets, nep-for, nep-mac and nep-ure
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:06-25

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