Do Financial Variables Help Predict Macroeconomic Environment?
In this paper, we examine the pseudo out-of-sample forecasting ability of various financial variables (namely, credit, bank liquidity, loan losses provisions, share of non-performing loans and PX stock market index) for inflation and GDP growth in the Czech Republic. To do so, we estimate a block-restriction vector autoregression model consisting of Czech macroeconomic and financial variables and euro area macroeconomic variables in 1999:1-2009:9. Our results suggest that financial variables typically have a systematic and statistically significant effect on macroeconomic fluctuations. In terms of forecast evaluation, financial variables in general seem to improve the forecasts of macroeconomy, but the predictive performance of individual financial variables varies over time, in particular during 2008-2009 financial crisis. Among other things, the results give some support for the risk-taking channel of monetary policy, as the level of monetary policy rate is negatively associated with
