Forecasting macroeconomy using Granger-causality network connectedness

Dan Wang and Wei-Qiang Huang

Applied Economics Letters, 2021, vol. 28, issue 16, 1363-1370

Abstract: The connectedness among financial institutions reflects potential channels for risk contagion and the amplification of risk to the financial system that can also propagate into the real economy. This study investigates the predictive power of financial network connectedness for macroeconomy. We highlight the connectedness by quantifying the effects of risk transmission among financial institutions in Granger-causality networks. The aggregate macroeconomy is viewed as a proxy for economic activity and is extracted from several monthly single macroeconomic variables by principal component analysis. We use the n-month-ahead multivariate predictive regressions to explore the predictive power of the connectedness and test whether the predictive ability is robust. The results show that after controlling for a number of factors, an increase in network connectedness among Chinese financial institutions strongly and stably predicts higher Chinese economic activity about four to twelve (except for five) months into the future.

Date: 2021
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DOI: 10.1080/13504851.2020.1817302

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