Financial-cycle ratios and medium-term predictions of GDP: Evidence from the United States

Abstract: 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.

Date: 2021-11, Revised 2024-01
New Economics Papers: this item is included in nep-cwa, nep-for and nep-mac
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Journal Article: Financial-cycle ratios and medium-term predictions of GDP: Evidence from the United States (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2111.00822

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