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A Re-examination of the Predictability of Economic Activity Using the Yield Spread

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Author Info
James D. Hamilton
Dong Heon Kim

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Abstract

This paper revisits the yield spread's usefulness for predicting future real GDP growth. We show that the contribution of the spread can be decomposed into the effect of expected future changes in short rates and the effect of the term premium. We find that both factors are relevant for predicting real GDP growth but the respective contributions differ. We investigate whether the cyclical behavior of interest rate volatility could account for either or both effects. We find that while volatility displays important correlations with both the term structure of interest rates and GDP, it does not appear to account for the yield spread's usefulness for predicting GDP growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7954.

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Date of creation: Oct 2000
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Publication status: published as Hamilton, James D. and Dong Heon Kim. "A Reexamination Of The Predictability Of Economic Activity Using The Yield Spread," Journal of Money, Credit and Banking, 2002, v34(2,May), 340-360.
Handle: RePEc:nbr:nberwo:7954

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

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