Are financial spreads useful indicators of future inflation and output growth in EU countries?
✍ Scribed by E. Philip Davis; Gabriel Fagan
- Publisher
- John Wiley and Sons
- Year
- 1997
- Tongue
- English
- Weight
- 186 KB
- Volume
- 12
- Category
- Article
- ISSN
- 0883-7252
No coin nor oath required. For personal study only.
✦ Synopsis
This paper seeks to address the policy issue of the usefulness of ®nancial spreads as indicators of future in¯ation and output growth in the countries of the European Union, placing a particular focus on out-ofsample forecasting performance. Such analysis is of considerable relevance to monetary authorities, given the breakdown of the money/income relation in a number of countries and following increased emphasis of domestic monetary policy on control of in¯ation following the broadening of the ERM bands. The results con®rm that for some countries, ®nancial spread variables do contain some information about future output growth and in¯ation, with the yield curve and the reverse yield gap performing best. However, the relatively poor out-of-sample forecasting performance and/or parameter instability suggests that the need for caution in using spread variables for forecasting in EU countries. Only a small number of spreads contain information, and improve forecasting in a manner which is stable over time.