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The decline in the predictive power of the US term spread: A structural interpretation

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  • Morell, Joseph

Abstract

Numerous studies have found the term spread to be a significant predictor of future real output growth. However, in the case of the US, the term spread’s predictive power has diminished from the mid-1980s till present. This paper provides new evidence to the debate on why the term spread leads output growth. We do this by structurally accounting for the decline in the predictive power of the US term spread. Our findings indicate that it is changes to the composition of shocks hitting the US economy which has caused the term spread, through the endogenous monetary policy response, to be a less reliable indicator of future output growth in recent decades.

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  • Morell, Joseph, 2018. "The decline in the predictive power of the US term spread: A structural interpretation," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 314-331.
    • Handle: RePEc:eee:jmacro:v:55:y:2018:i:c:p:314-331
    DOI: 10.1016/j.jmacro.2017.12.003
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    More about this item

    Keywords

    Term spread; Forecasting; Structural break;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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