A Reevaluation of Financial Variables' Predictive Content for the U.S. Economy

Douyoung Lee

No 20161029-001, Working Papers from Texas A&M University, Department of Economics

Abstract: This paper reevaluates the predictive content of financial variables and unconventional monetary policy measures for the U.S. output growth and inflation before, during, and after the Great Recession from 1960-2015. The credit spread, stock price, and market expectation measures predicted output growth and inflation change significantly better than an AR model during the Great Recession. This study shows that the Great Recession was primarily driven by a financial shock and market sentiment shock; the market expectation measures, liquidity risk, and credit risk were important indicators during the financial crisis, compared to the previous recessionary periods.

Keywords: Output growth forecasts; Inflation forecasts; Forecast evaluation; Real-time data (search for similar items in EconPapers)
JEL-codes: C32 E37 E47 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-10-29
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