The Unassuming Economist

A new IMF working paper by Sophia Chen and Romain Ranciere studies the forecasting power of financial variables for macroeconomic variables for 62 countries between 1980 and 2013. They find that financial variables such as credit growth, stock prices and house prices have considerable predictive power for macroeconomic variables at one to four quarters horizons. A forecasting model with financial variables outperforms the World Economic Outlook (WEO) forecasts in up to 85 percent of our sample countries at the four quarters horizon. They also find that cross-country panel models produce more accurate out-of-sample forecasts than individual country models.