Financial Market Variables Do Not Predict Real Activity

The past decade has seen an extensive empirical reassessment of the information content of financial market variables sensitive to monetary policy. Particularly provocative are recent papers suggesting that some interest rates and interest rate spreads contain more information about economic activity than monetary aggregates. This paper reviews important methodological pitfalls in these studies. We then show that none of the commonly employed measures of monetary policy contain incremental information useful in forecasting real economic activity. Two conclusions are possible. Either monetary policy innovations have no significant real effects, or we (collectively) have failed in our efforts to measure monetary policy. ( JEL E52)