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Does the Real Business Cycle Help Forecast the Financial Cycle?
Fredj Jawadi1, Hachmi Ben Ameur2, Stephanie Bigou3
1Univ. Lille, ULR 4999 - LUMEN, 59000 Lille, France.
Computational Economics
|September 28, 2021
Summary
The US economic indicator can forecast financial markets. A strong link exists between financial and economic cycles, especially during expansion-growth phases, aiding investors and policymakers.
Area of Science:
- Economics
- Financial Markets
- Macroeconomic Analysis
Background:
- Understanding the interplay between financial markets and the real economy is crucial for economic stability.
- Previous research has explored these relationships, but a nuanced analysis of cycle phases is often lacking.
Purpose of the Study:
- To investigate the dynamic relationship between the US financial market and the real business cycle.
- To develop and apply novel indicators for measuring financial and real business cycles.
- To analyze the strength of this relationship across different cycle phases.
Main Methods:
- Utilized monthly time-series data from February 1987 to March 2016 for the US.
- Developed financial and real business cycle indicators using principal component analysis.
- Employed a vector autoregressive model to examine the interdependencies between economic and financial indicators.
Main Results:
- The economic indicator proved effective in forecasting financial market movements.
- A significant and dynamic relationship was identified between the financial and economic cycles.
- This relationship was found to be notably stronger during the 'expansion-growth' phase.
Conclusions:
- The real business cycle provides valuable information for predicting financial sector dynamics.
- Investors and policymakers can leverage these findings for improved forecasting and decision-making.
- The study highlights the importance of considering specific cycle phases in economic-financial analysis.