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The return of financial variables in forecasting GDP growth in the G-7

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Abstract

The financial crisis and subsequent sovereign debt crisis together had a profound impact on the current economic environment. This study reexamines the established stylized facts and previous evidence regarding the predictive association between financial variables and real economic activity considering changed economic circumstances. This paper focuses on the predictive ability of the term spread, short-term interest rate and stock returns for real GDP growth in the G-7 countries. We compare the predictive content of nominal financial variables with that of real financial variables and consider the proper number of financial predictors and time variations of forecasting performance. The forecasting results unambiguously indicate that financial variables have regained their predictive power since the financial crisis. Moreover, this study shows that real financial variables are superior to nominal variables and that using several financial indicators for forecasting GDP growth is preferable.

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Acknowledgements

We would like to thank two anonymous referees and participants of the 20th ICMAIF conference in Rethymno for valuable and constructive comments.

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Correspondence to Petri Kuosmanen.

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Kuosmanen, P., Vataja, J. The return of financial variables in forecasting GDP growth in the G-7. Econ Change Restruct 50, 259–277 (2017). https://doi.org/10.1007/s10644-017-9212-7

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