Financial Variables and Macroeconomic Forecast Errors

47 Pages Posted: 11 Jan 2018

See all articles by Michelle L. Barnes

Michelle L. Barnes

Federal Reserve Bank of Boston

Giovanni Olivei

Federal Reserve Bank of Boston

Date Written: 2017-10-31

Abstract

A large set of financial variables has only limited power to predict a latent factor common to the year-ahead forecast errors for real Gross Domestic Product (GDP) growth, the unemployment rate, and Consumer Price Index (CPI) inflation for three sets of professional forecasters: the Federal Reserve’s Greenbook, the Survey of Professional Forecasters (SPF), and the Blue Chip Consensus Forecasts. Even when a financial variable appears to be fairly robust across sample periods in explaining the latent factor, from an economic standpoint its contribution appears modest. Still, several financial variables retain economic significance over certain subsamples; when non-linear effects are accounted for, these variables have an improved ability to consistently predict the latent factor over the business cycle.

Keywords: forecast errors, macroeconomy, financial variables, threshold estimation, business cycle

JEL Classification: C24, C53, C55, E37, E44, E50, G01, G17

Suggested Citation

Barnes, Michelle L. and Olivei, Giovanni, Financial Variables and Macroeconomic Forecast Errors (2017-10-31). FRB of Boston Working Paper No. 17-17. Available at SSRN: https://ssrn.com/abstract=3100063

Michelle L. Barnes (Contact Author)

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Giovanni Olivei

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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