Scandinavian Working Papers in Economics
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Bank of Finland 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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