The return of financial variables in forecasting GDP growth in the G-7

Petri Kuosmanen () and Juuso Vataja ()
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Petri Kuosmanen: University of Vaasa
Juuso Vataja: University of Vaasa

Economic Change and Restructuring, 2017, vol. 50, issue 3, No 5, 259-277

Abstract: Abstract The financial crisis and subsequent sovereign debt crisis together had a profound impact on the current economic environment. This study reexamines the established stylized facts and previous evidence regarding the predictive association between financial variables and real economic activity considering changed economic circumstances. This paper focuses on the predictive ability of the term spread, short-term interest rate and stock returns for real GDP growth in the G-7 countries. We compare the predictive content of nominal financial variables with that of real financial variables and consider the proper number of financial predictors and time variations of forecasting performance. The forecasting results unambiguously indicate that financial variables have regained their predictive power since the financial crisis. Moreover, this study shows that real financial variables are superior to nominal variables and that using several financial indicators for forecasting GDP growth is preferable.

Keywords: Term spread; Short-term interest rate; Stock market; Forecasting; Macroeconomy (search for similar items in EconPapers)
JEL-codes: E37 E44 E47 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10644-017-9212-7

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