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Investigating time-variation in the marginal predictive power of the yield spread

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  • Benati, Luca
  • Goodhart, Charles

Abstract

We use Bayesian time-varying parameters VARs with stochastic volatility to investigate changes in the marginal predictive content of the yield spread for output growth in the United States and the United Kingdom, since the Gold Standard era, and in the Eurozone, Canada, and Australia over the post-WWII period. Overall, our evidence does not provide much support for either of the two dominant explanations why the yield spread may contain predictive power for output growth, the monetary policy-based one, and Harvey’s (1988) ‘real yield curve’ one. Instead, we offer a new conjecture. JEL Classification: E42, E43, E47

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Paper provided by European Central Bank in its series Working Paper Series with number 0802.

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Date of creation: Aug 2007
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Handle: RePEc:ecb:ecbwps:20070802

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Keywords: Bayesian VARs; medianunbiased; stochastic volatility; time-varying parameters;

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References

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Citations

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Cited by:
  1. Nakaota, Hiroshi & Fukuta, Yuichi, 2013. "The leading indicator property of the term spread and the monetary policy factors in Japan," Japan and the World Economy, Elsevier, vol. 28(C), pages 85-98.
  2. Yunus Aksoy & Henrique S. Basso, 2012. "Liquidity, Term Spreads and Monetary Policy," CESifo Working Paper Series 3988, CESifo Group Munich.
  3. Luís Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2010. "The yield curve and the macro-economy across time and frequencies," CEF.UP Working Papers 1004, Universidade do Porto, Faculdade de Economia do Porto.
  4. Hiroshi Nakaota & Yuichi Fukuta, 2013. "The Leading Indicator Property of the Term Spread and the Monetary Policy Factors in Japan," Discussion Papers in Economics and Business 13-09-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  5. Schrimpf, Andreas & Wang, Qingwei, 2010. "A reappraisal of the leading indicator properties of the yield curve under structural instability," International Journal of Forecasting, Elsevier, vol. 26(4), pages 836-857, October.
  6. Gallegati, Marco & Ramsey, James B. & Semmler, Willi, 2014. "Interest rate spreads and output: A time scale decomposition analysis using wavelets," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 283-290.
  7. Francis Bismans & Reynald Majetti, 2013. "Forecasting recessions using financial variables: the French case," Empirical Economics, Springer, vol. 44(2), pages 419-433, April.
  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. Hiroshi Nakaota & Yuichi Fukuta, 2013. "The Leading Indicator Property of the Term Spread and the Monetary Policy Factors in Japan," Discussion Papers in Economics and Business 13-09, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Jul 2013.
  10. Márcio Laurini & João Frois Caldeira, 2012. "Some Comments on a Macro-Finance Model with Stochastic Volatility," IBMEC RJ Economics Discussion Papers 2012-04, Economics Research Group, IBMEC Business School - Rio de Janeiro.
  11. Dalu Zhang & Peter Moffatt, 2013. "Time series non-linearity in the real growth / recession-term spread relationship," University of East Anglia Applied and Financial Economics Working Paper Series 047, School of Economics, University of East Anglia, Norwich, UK..

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