Research Discussion Papers, Bank of Finland
No 2/2004:
Extracting growth and inflation expectations from financial market data
Lauri Kajanoja
Abstract: This study presents a framework for extracting long-run
GDP growth and inflation expectations from financial market data on a
real-time basis. The framework uses information from both stock and bond
markets. It builds on a dividend discount model of stock valuation and on a
linearized consumption Euler equation. Furthermore, expected long-run
dividend growth for a broad equity index is assumed to be related to
expected long-run GDP growth. Short-run and long-run dividend growth
expectations are allowed to differ. The former are measured using equity
index futures. We extract growth and inflation expectations for the euro
area and for the United States.
Keywords: inflation expectations; growth expectations; equity index futures; (follow links to similar papers)
JEL-Codes: E31; E44; E66; (follow links to similar papers)
28 pages, January 20, 2004
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