Financial Variables' Predictive Content for the U.S. Economy During the Great Recession

Abstract

This paper uses data from 1960-2015 to evaluate the predictive content of financial variables and unconventional monetary policy measures for the U.S. output growth and inflation before, during, and after the Great Recession. During the Great Recession, this work shows that the predictive ability of the credit spread, stock price, and market expectation measures for output growth and inflation change significantly increased. The result is consistent with the idea that the Great Recession was primarily driven by a financial shock and market sentiment shock, and that the market expectation measures, liquidity risk, and credit risk were more important indicators during the Great Recession than during previous recessionary periods.