Term Spread
GDP Growth Predictions through the Yield Spread. Time-Variation and Structural Breaks
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JEL code(s)
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C22 Single Equation Models; Single Variables: Time-Series Models
C32 Multiple or Simultaneous Equation Models: Time-Series Models C53 Forecasting and Other Model Applications E37 Prices, Business Fluctuations, and Cycles: Forecasting and Simulation E43 Determination of Interest Rates; Term Structure of Interest Rates E47 Money and Interest Rates: Forecasting and Simulation |
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Keywords
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Date published:
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February 1, 2011
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Abstract:
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We use TVP 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 US 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 US in recent years; (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.
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Paper:
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Download the paper [1.42 MB]
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