Financial-cycle ratios and medium-term predictions of GDP: Evidence from the United States
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arXiv
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| Format: | Preprint |
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2021
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| _version_ | 1866916097083572224 |
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| author | Moramarco, Graziano |
| author_facet | Moramarco, Graziano |
| contents | Using a large quarterly macroeconomic dataset for the period 1960-2017, we document the ability of specific financial ratios from the housing market and firms' aggregate balance sheets to predict GDP over medium-term horizons in the United States. A cyclically adjusted house price-to-rent ratio and the liabilities-to-income ratio of the non-financial non-corporate business sector provide the best in-sample and out-of-sample predictions of GDP growth over horizons of one to five years, based on a wide variety of rankings. Small forecasting models that include these indicators outperform popular high-dimensional models and forecast combinations. The predictive power of the two ratios appears strong during both recessions and expansions, stable over time, and consistent with well-established macro-finance theory. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2111_00822 |
| institution | arXiv |
| publishDate | 2021 |
| record_format | arxiv |
| spellingShingle | Financial-cycle ratios and medium-term predictions of GDP: Evidence from the United States Moramarco, Graziano Econometrics Using a large quarterly macroeconomic dataset for the period 1960-2017, we document the ability of specific financial ratios from the housing market and firms' aggregate balance sheets to predict GDP over medium-term horizons in the United States. A cyclically adjusted house price-to-rent ratio and the liabilities-to-income ratio of the non-financial non-corporate business sector provide the best in-sample and out-of-sample predictions of GDP growth over horizons of one to five years, based on a wide variety of rankings. Small forecasting models that include these indicators outperform popular high-dimensional models and forecast combinations. The predictive power of the two ratios appears strong during both recessions and expansions, stable over time, and consistent with well-established macro-finance theory. |
| title | Financial-cycle ratios and medium-term predictions of GDP: Evidence from the United States |
| topic | Econometrics |
| url | https://arxiv.org/abs/2111.00822 |