Financial variables and economic activity in the Nordic countries

- We use TAR models to forecast economic activity in the Nordic countries.
- This study utilizes stock market and interest rate information to predict GDP growth.
- Inversion-recession signals are applied to switch between different growth regimes.
- TAR models outperform other linear and nonlinear models in predicting GDP growth.
- We could not detect clear link between monetary regimes and forecast performance.

This study focuses on the predictive content of stock returns, short-term interest rates and the term spread by using non-linear regime switching models for forecasting GDP growth in Denmark, Finland, Norway and Sweden. We apply the threshold autoregressive (TAR) model-switching approach and the novel regime-switching signals which combine the inversion of the yield curve and the recession as the signal to switch between economic states.The results suggest that the TAR model approach with an inversion-recession signal is preferable for predicting economic activity in all four of the Nordic countries. Among the Nordic countries, the predictive relationship between financial variables and economic activity is found to be the strongest in Finland and Sweden.