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Does the yield spread predict real economic activity? : a multicountry analysis

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  • Catherine Bonser-Neal
  • Timothy R. Morley
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    Abstract

    This article evaluates the ability of the yield spread to forecast real economic activity in 11 industrial countries. The first section of this article defines the yield spread and explains why the spread may be a useful predictor of real economic activity. The second section describes the data and criteria used to evaluate the predictive power of the yield spread. The third section examines whether yield spreads have reliably forecast real economic activity in the 11 countries, using several measures of real economic activity and alternative forecast horizons. The empirical results indicate the yield spread is a statistically and economically significant predictor of real economic activity in several industrial countries besides the United States. In addition, the yield spread forecasting model generally outperforms two alternative forecasting models in predicting future real GDP growth.

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    File URL: http://www.kansascityfed.org/publicat/econrev/pdf/3q97bons.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

    Volume (Year): (1997)
    Issue (Month): Q III ()
    Pages: 37-53

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    Handle: RePEc:fip:fedker:y:1997:i:qiii:p:37-53:n:v.82no.3

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    Related research

    Keywords: Economic conditions - United States ; Interest rates ; Forecasting ; Gross domestic product;

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    Cited by:
    1. Georgopoulos, George & Hejazi, Walid, 2009. "Financial structure and the heterogeneous impact of monetary policy across industries," Journal of Economics and Business, Elsevier, vol. 61(1), pages 1-33.
    2. Nakaota, Hiroshi, 2005. "The term structure of interest rates in Japan: the predictability of economic activity," Japan and the World Economy, Elsevier, vol. 17(3), pages 311-326, August.
    3. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
    4. Benati, Luca & Goodhart, Charles, 2008. "Investigating time-variation in the marginal predictive power of the yield spread," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1236-1272, April.
    5. Luis Eduardo Arango & Luz Adriana Flórez & Angélica María Arosemena, 2003. "El tramo corto de la estructura a plazo como predictor de expectativas de la actividad económica en Colombia," BORRADORES DE ECONOMIA 002559, BANCO DE LA REPÚBLICA.
    6. Gomez-Biscarri, Javier, 2008. "Changes in the informational content of term spreads: Is monetary policy becoming less effective?," Journal of Economics and Business, Elsevier, vol. 60(5), pages 415-435.
    7. Andrea Nobili, 2005. "Forecasting Output Growth And Inflation In The Euro Area: Are Financial Spreads Useful?," Temi di discussione (Economic working papers) 544, Bank of Italy, Economic Research and International Relations Area.
    8. Mario Reyna Cerecero & Diana Salazar Cavazos & Héctor Salgado Banda, 2008. "The Yield Curve and its Relation with Economic Activity: The Mexican Case," Working Papers 2008-15, Banco de México.
    9. Mehl, Arnaud, 2006. "The yield curve as a predictor and emerging economies," BOFIT Discussion Papers 18/2006, Bank of Finland, Institute for Economies in Transition.
    10. Esther Fernández Galar & Javier Gómez Biscarri, 2003. "Revisiting the Ability of Interest Rate Spreads to Predict Recessions: Evidence for a," Faculty Working Papers 04/03, School of Economics and Business Administration, University of Navarra.
    11. Rajan Goyal & K. Kanagasabapathy, 2002. "Yield Spread as a Leading Indicator of Real Economic Activity-- An Empirical Exercise on the Indian Economy," IMF Working Papers 02/91, International Monetary Fund.
    12. Michael Dotsey, 1998. "The predictive content of the interest rate term spread for future economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 31-51.
    13. Karunaratne, Neil Dias, 2002. "Predicting Australian Growth and Recession Via the Yield Curve," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 32(2), pages 233-250, June Spec.

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