Financial conditions and density forecasts for US output and inflation

If the links between credit markets and real economy tighten in a crisis, financial indicators might be particularly useful in forecasting the macroeconomic outcomes associated with episodes of financial distress. We examine this conjecture by using a range of linear and nonlinear VAR models to generate predictive distributions for US inflation and industrial production growth. Financial variables display significant predictive power over the Great Recession period, particularly if used within a threshold model that captures the structural break associated to the crisis. However, the Great Recession is unique: financial information and thresholds make little difference for forecasting prior to 2008.