Financial Factors and Real Activity : the Belgian Case

In a standard IS-LM model the effects of monetary policy on real activity come through the demand for money and the (unique) interest rate. Actually, under imperfect substitution among financial instruments, shocks of monetary policy will affect the relative structure of interest rates. In this paper we analyse the information content of the relative structure of interest rates on Belgian economic activity, measured through a set of proxy variables like industrial production, investment, etc. In order to analyse their informative content, we have performed Granger-causality tests and Var analysis. We have then compared the predictive power of spreads with other financial variables such as interest rates, monetary and credit aggregates and exchange rates. A major conclusion is that " bank-related " spreads are informative about economic activity. This seems to confirm the important role banks play on economic activity.