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How Stable is the Forecasting Performance of the Yield Curve for Output Growth?

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  • Raffaella Giacomini
  • Barbara Rossi

Abstract

We provide an extensive evaluation of the predictive performance of the US yield curve for US gross domestic product growth by using new tests for forecast breakdown, in addition to a variety of in-sample and out-of-sample evaluation procedures. Empirical research over the past decades has uncovered a strong predictive relationship between the yield curve and output growth, whose stability has recently been questioned. We document the existence of a forecast breakdown during the Burns-Miller and Volker monetary policy regimes, whereas during the early part of the Greenspan era the yield curve emerged as a more reliable model to predict future economic activity. Copyright 2006 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 68 (2006)
Issue (Month): s1 (December)
Pages: 783-795

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Handle: RePEc:bla:obuest:v:68:y:2006:i:s1:p:783-795

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Cited by:
  1. Pesaran, M.H. & Pick, A. & Pranovich, M., 2011. "Optimal Forecasts in the Presence of Structural Breaks (Updated 14 November 2011)," Cambridge Working Papers in Economics 1163, Faculty of Economics, University of Cambridge.
  2. Marco Buchmann, 2011. "Corporate bond spreads and real activity in the euro area - Least Angle Regression forecasting and the probability of the recession," Working Paper Series 1286, European Central Bank.
  3. Barbara Rossi, 2011. "Advances in Forecasting Under Instability," Working Papers 11-20, Duke University, Department of Economics.
  4. Thomas B. King & Andrew T. Levin & Roberto Perli, 2007. "Financial market perceptions of recession risk," Finance and Economics Discussion Series 2007-57, Board of Governors of the Federal Reserve System (U.S.).
  5. Pierre Perron & Yohei Yamamoto, 2008. "On the Usefulness or Lack Thereof of Optimality Criteria for Structural Change Tests," Boston University - Department of Economics - Working Papers Series wp2008-006, Boston University - Department of Economics.
  6. Leo Krippner & Leif Anders Thorsrud, 2009. "Forecasting New Zealand's economic growth using yield curve information," Reserve Bank of New Zealand Discussion Paper Series DP2009/18, Reserve Bank of New Zealand.
  7. Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc.
  8. David C. Wheelock & Mark E. Wohar, 2009. "Can the term spread predict output growth and recessions? a survey of the literature," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 419-440.
  9. Zagaglia, Paolo, 2006. "Does the Yield Spread Predict the Output Gap in the U.S.?," Research Papers in Economics 2006:5, Stockholm University, Department of Economics.
  10. Marcelle Chauvet & Zeynep Senyuz, 2012. "A dynamic factor model of the yield curve as a predictor of the economy," Finance and Economics Discussion Series 2012-32, Board of Governors of the Federal Reserve System (U.S.).
  11. Chauvet, Marcelle & Senyuz, Zeynep, 2008. "A Joint Dynamic Bi-Factor Model of the Yield Curve and the Economy as a Predictor of Business Cycles," MPRA Paper 15076, University Library of Munich, Germany, revised Apr 2009.
  12. Zagaglia, Paolo, 2006. "The Predictive Power of the Yield Spread under the Veil of Time," Research Papers in Economics 2006:4, Stockholm University, Department of Economics.
  13. He, Zhongfang, 2009. "Forecasting output growth by the yield curve: the role of structural breaks," MPRA Paper 28208, University Library of Munich, Germany.
  14. Jonas Dovern & Christina Ziegler, 2008. "Predicting Growth Rates and Recessions. Assessing U.S. Leading Indicators under Real-Time Condition," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 54(4), pages 293-318.
  15. Panopoulou, Ekaterini, 2009. "Financial variables and euro area growth: A non-parametric causality analysis," Economic Modelling, Elsevier, vol. 26(6), pages 1414-1419, November.
  16. M Hashem Pesaran & Andreas Pick & Mikhail Pranovich, 2011. "Optimal Forecasts in the Presence of Structural Breaks," DNB Working Papers 327, Netherlands Central Bank, Research Department.
  17. Jonathan H. Wright, 2006. "The yield curve and predicting recessions," Finance and Economics Discussion Series 2006-07, Board of Governors of the Federal Reserve System (U.S.).
  18. Bellégo, C. & Ferrara, L., 2009. "Forecasting Euro-area recessions using time-varying binary response models for financial," Working papers 259, Banque de France.

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