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Does the Yield Spread Predict the Output Gap in the U.S.?

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Author Info
Zagaglia, Paolo () (Dept. of Economics, Stockholm University)

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Abstract

Yes, but only at short horizons from 1 to 3 quarters over the full post-World War II sample. The predictive relation between the yield spread and the output gap is characterized by parameter instability. Differently from the predictive models of the yield spread for output growth, structural instability is not due to a loss of predictive ability after 1985. Rather, the predictive relation estimated on post-1985 data holds for a range of horizons larger than for pre-1985 data. I also show that the information on current monetary policy is statistically irrelevant for the prediction of the output gap over the post-1985 subsample.

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Publisher Info
Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2006:5.

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Length: 17 pages
Date of creation: 08 May 2006
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Handle: RePEc:hhs:sunrpe:2006_0005

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Related research
Keywords: output gap; yield spread; predictability;

Find related papers by JEL classification:
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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