Do Asset Prices in Transition Countries Contain Information about Future Economic Activity? (Electronic book text)

The purpose of this paper is to assess if the prices observed in stock, money, and foreign exchange markets in transition countries contain information about future real economic activity. This is investigated in three different empirical analyses, examining if stock prices, short term interest rates, and the exchange rate signal future movements in industrial production, unemployment, and real wages. The conclusion is that asset prices do contain information about future movements in real variables, and in particular it is found that asset prices significantly signal future movements in industrial production. These results have important implications for policymakers in transition countries and a composite leading indicator based on the stock price, the interest rate, and the exchange rate is suggested which can yield information about future developments in real activity.