Do financial variables help predict the state of the business cycle in small open economies? Evidence from Switzerland |
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Authors: | Mario Meichle Angelo Ranaldo Attilio Zanetti |
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Institution: | (1) European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany |
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Abstract: | We analyze the forecasting ability of financial variables to predict the state of the Swiss business cycle up to eight quarters
ahead. Overall, our results suggest that financial variables convey leading information for the prediction of business cycles,
even when applied to a small open economy. However, we clearly find that model specifications need to be extended to include
variables accounting for external shocks, such as exchange rates or international commodity prices. It also appears that the
forecasting contribution of individual variables changes over time. Specifically, in the last two decades, stock market liquidity
has replaced the term spread as the best single predictor. |
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