The Yield Curve and the Prediction on the Business Cycle: a Var Analysis for the European Union
AbstractThe literature on the yield curve deals with the capacity to predict the future inflation and the future real growth from the term structure of the interest rates. The aim of the paper is to verify this predictive power of the yield curve for the European Union at 16 countries in the 1995-2008 years. With this regard we propose two VAR models. The former is derived from the standard approach. The later is an extended version considering explicitly the macroeconomic effects of the risk premium. We propose the estimates of the models and their out-of-sample forecasts through both the European Union GDP (Gross Domestic Product) quarterly series and the European Union IPI (Industrial Production Index) monthly series. We show that our extended model performs better than the standard model and that the out-of-sample forecasts of the IPI monthly series are better than ones of the GDP quarterly series. Moreover the out-of-sample exercises seems us very useful because they show the jump out arising from Lehman Brother's unexpected crash and the becoming next fine tuning process.
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Bibliographic InfoArticle provided by ASERS Publishing in its journal Theoretical and Practical Research in Economic Fields.
Volume (Year): I (2010)
Issue (Month): 2 (December)
Pages: 183 - 209
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Web page: http://www.asers.eu/journals/tpref.html
yield curve; monetary policy; business cycle; risk premium; real growth;
Other versions of this item:
- Cinquegrana, Giuseppe & Sarno, Domenico, 2010. "The yield curve and the prediction on the business cycle: a VAR analysis for the European Union," MPRA Paper 21795, University Library of Munich, Germany.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- 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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- John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
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