Financial indicators play a key role in forecasting exercises: the evolution of major asset prices such as interest rates (which relate to the price of a short-term loan or a bond), equities, house prices and exchange rates has large implications for how the macroeconomic outlook evolves. As stressed in Chapter 3, asset prices can exert substantial wealth effects on consumption behaviour, since a large share of household wealth is held in the form of bonds, stocks and housing. Asset prices also play an important role in driving business investment. In turn, asset prices are driven by various forces including macroeconomic developments, and in particular by interest rates, taxation, demography and international factors (such as the portfolio strategies of global fund managers).
KeywordsExchange Rate Interest Rate Monetary Policy Financial Crisis Central Bank
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