The Role of Financial Spreads in Macroeconomic Forecasting: Evidence for the UK
We examine the potential use of financial spreads in forecasting aggregate macroeconomic activity in the UK. We develop a quarterly Bayesian vector autoregressive macroeconomic model which is used to generate out-of-sample forecasts for GDP, prices, real effective exchange rate, interest rate and other macroeconomic variables at varying forecast horizons over the period 1989Q1–1995Q2. The forecasts are generated through sequential re-estimation using the Kalman filter. Extensive experimentation is undertaken, using different priors, monetary indicators and financial spreads. The empirical results suggest that financial spreads in the UK do not contain any predictive information on future real macroeconomic activity, but they yield a significant improvement in price predictions.
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Document Type: Original Article
Affiliations: 1: Centre for International Capital Markets, London Guildhall University, 2: City University Business School
Publication date: 01 January 1999