Abstract
The issues of interpretation and estimation of VAR models of output which use financial spreads as indicators are reviewed and new empirical evidence is provided using U.K. data. The principal extensions to the existing U.S. literature are estimation of the role of spreads in the context of a cointegrating model as well as a dynamic VAR, and also use of the reverse yield gap (bond yield less equity yield) as an alternative indicator to traditional spreads such as the yield gap and credit quality spread. The evidence presented suggests financial spreads may have an important indicator function in the U.K., especially in predicting short-run movements in the real economy. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester
Published Version
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