Linkages Between Financial and Macroeconomic Indicators in Emerging Markets and Developing Economies

This paper provides systematic empirical evidence on the finance-growth nexus literature with the key contributions being our focus on previously unexplored Emerging Markets and Developing Economies (EMDEs) and using mixed frequencies. Using Fixed Effects and MIDAS panel regressions for 50 countries, spanning the period 1990 through 2019, we examine the forecasting reliability of major macroeconomic indicators by financial indicators. Our results support the notion that financial indicators, such as national stock market index returns, private credit, and exchange rates, are statistically significant determinants of major macroeconomic indicators, such as aggregate production, inflation, and unemployment. Use of MIDAS panel regressions extracts further information from the financial variables as the predictive power improves in those models. The results are useful for policymakers, academics, as well as practitioners, as timely, reliable data on real indicators are hard to come by in EMDEs, whereas financial indicators are readily available