FINANCIAL MARKET VARIABLES DO NOT PREDICT REAL ACTIVITY

Mark A. Thoma · Jo Anna Gray

40 citations0/0 files storedEconomic Inquiry

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Economic theories and models

Abstract

The past decade has seen an extensive empirical reassessment of the information content of financial market variables sensitive to monetary policy. Particularly provocative are recent papers suggesting that some interest rates and interest rate spreads contain more information about economic activity than monetary aggregates. This paper reviews important methodological pitfalls in these studies. We then show that none of the commonly employed measures of monetary policy contain incremental information useful in forecasting real economic activity. Two conclusions are possible. Either monetary policy innovations have no significant real effects, or we (collectively) have failed in our efforts to measure monetary policy. (JEL E52)

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References

1989The federal funds rate and the channels of monetary transmission 1986Are Forecasting Models Usable for Policy Analysis?1989NBER macroeconomics annual 1987 1992Money, Income, Prices and Interest Rates 1995The identification of monetary policy disturbances explaining the liquidity puzzle 1994The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification 1993Business Cycles, Indicators, and Forecasting 1990On the Predictive Power of Interest Rates and Interest Rate Spreads

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