GROSS DOMESTIC PRODUCT GROWTH PREDICTIONS THROUGH THE YIELD SPREAD: TIME‐VARIATION AND STRUCTURAL BREAKS

Pierangelo De Pace

15 citations0/0 files storedInternational Journal of Finance & Economics

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Forecasting Techniques and Applications

Abstract

ABSTRACT We use time‐varying‐parameter models and real‐time data to describe the evolution of the leading properties of the yield spread for output growth in five European economies and in the USA over the last decades and until the third quarter of 2010. We evaluate the predictive performance of benchmark term‐structure models and identify structural breaks in the marginal processes of term spreads and government bond yields to shed light on the dynamic characteristics of the yield curve. Econometric analysis shows that (i) the predictive content of the term spread is not always significant over time and across countries; (ii) the spread significantly contributes to the forecast performance of simple growth regressions in Europe but not in the USA in recent years; and (iii) the variance of the random shocks to the term spreads tends to fall in all countries. This decline is accompanied by vanishing leading properties from the mid‐1990s. Such properties reappear after 2008. Copyright © 2012 John Wiley & Sons, Ltd.

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1994Comparing Predictive Accuracy 1997Testing the equality of prediction mean squared errors 1989New Indexes of Coincident and Leading Economic Indicators 1991The Term Structure as a Predictor of Real Economic Activity 2001Tests of equal forecast accuracy and encompassing for nested models 1997The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank 2000Testing for structural change in conditional models 2003How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States

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