Forecasting in the euro area: The role of the US long rate

This letter analyses the relationship between economic variables in the euro area and the United States and determines the importance of various indicators in forecasting the euro area macroeconomy. Results using a novel empirical technique show that innovations in the U.S. long-term interest rate (long rate) explain substantial variation in euro area GDP and inflation. This finding is consistent over a historical sample and supports the emphasis placed on U.S. economic conditions when constructing projections of the euro area macroeconomic outlook. The important contribution of the U.S. long rate most likely indicates its value as a proxy for the state of the global economy.