The Role of Financial Variables in predicting economic activity

Previous research found that the US business cycle leads the European one by a few quarters, and can therefore be useful in predicting euro area gross domestic product (GDP). In this paper we investigate whether additional predictive power can be gained by adding selected financial variables belonging to either the USA or the euro area. We use vector autoregressions (VARs) that include the US and euro area GDPs as well as growth in the Rest of the World and selected combinations of financial variables. Out‐of‐sample root mean square forecast errors (RMSEs) evidence that adding financial variables produces a slightly smaller error in forecasting US economic activity. This weak macro‐financial linkage is even weaker in the euro area, where financial indicators do not improve short‐ and medium‐term GDP forecasts even when their timely availability relative to GDP is exploited. It can be conjectured that neither US nor European financial variables help predict euro area GDP as the US GDP has already embodied this information. However, we show that the finding that financial variables have no predictive power for future activity in the euro area relates to the unconditional nature of the RMSE metric. When forecasting ability is assessed as if in real time (i.e. conditionally on the information available at the time when forecasts are made), we find that models using financial variables would have been preferred in several episodes and in particular between 1999 and 2002. Copyright 2011 John Wiley & Sons, Ltd.     

Interaction of sea water and lava during submarine eruptions at mid-ocean ridges

Lava erupts into cold sea water on the ocean floor at mid-ocean ridges (at depths of 2,500 m and greater), and the resulting flows make up the upper part of the global oceanic crust. Interactions between heated sea water and molten basaltic lava could exert significant control on the dynamics of lava flows and on their chemistry. But it has been thought that heating sea water at pressures of several hundred bars cannot produce significant amounts of vapour and that a thick crust of chilled glass on the exterior of lava flows minimizes the interaction of lava with sea water. Here we present evidence to the contrary, and show that bubbles of vaporized sea water often rise through the base of lava flows and collect beneath the chilled upper crust. These bubbles of steam at magmatic temperatures may interact both chemically and physically with flowing lava, which could influence our understanding of deep-sea volcanic processes and oceanic crustal construction more generally. We infer that vapour formation plays an important role in creating the collapse features that characterize much of the upper oceanic crust and may accordingly contribute to the measured low seismic velocities in this layer.