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GDP Trend Deviations and the Yield Spread: the Case of Five E.U. Countries

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  • Gogas, Periklis

    ()
    (Democritus University of Thrace, Department of International Economic Relations and Development)

  • Pragidis, Ioannis

    ()
    (Democritus University of Thrace, Department of International Economic Relations and Development)

Abstract

Several studies have established the predictive power of the yield curve in terms of real economic activity. In this paper we use data for a variety of E.U. countries: both EMU (Germany, France, Italy) and non-EMU members (Sweden and the U.K.). The data used range from 1991:Q1 to 2009:Q1. For each country, we extract the long run trend and the cyclical component of real economic activity, while the corresponding interbank interest rates of long and short term maturities are used for the calculation of the country specific yield spreads. We also augment the models tested with non monetary policy variables: the countries’ unemployment rates and stock indices. The methodology employed in the effort to forecast real output, is a probit model of the inverse cumulative distribution function of the standard distribution, using several formal forecasting and goodness of fit evaluation tests. The results show that the yield curve augmented with the non-monetary variables has significant forecasting power in terms of real economic activity but the results differ qualitatively between the individual economies examined raising non-trivial policy implications.

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Bibliographic Info

Paper provided by Democritus University of Thrace, Department of Economics in its series DUTH Research Papers in Economics with number 2-2010.

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Length: 17 pages
Date of creation: 08 May 2010
Date of revision:
Handle: RePEc:ris:duthrp:2010_002

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Postal: Department of Economics, University Campus, Komotini, 69100, Greece
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Web page: http://www.econ.duth.gr/
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Keywords: GDP; Probit; Forecasting; Yield Curve;

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  1. Hamilton, James D & Kim, Dong Heon, 2002. "A Reexamination of the Predictability of Economic Activity Using the Yield Spread," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 340-60, May.
  2. Marcelle Chauvet & Simon Potter, 2001. "Forecasting recessions using the yield curve," Staff Reports 134, Federal Reserve Bank of New York.
  3. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
  4. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
  5. Gogas, Periklis & Chionis, Dionisios & Pragkidis, Ioannis, 2009. "Predicting European Union recessions in the euro era: The yield curve as a forecasting tool of economic activity," MPRA Paper 13911, University Library of Munich, Germany.
  6. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
  7. De Graeve, Ferre & Emiris, Marina & Wouters, Raf, 2009. "A structural decomposition of the US yield curve," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 545-559, May.
  8. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  10. Venetis, Ioannis A. & Paya, Ivan & Peel, David A., 2003. "Re-examination of the predictability of economic activity using the yield spread: a nonlinear approach," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 187-206.
  11. Chay Fisher & Bruce Felmingham, 1998. "The Australian yield curve as a leading indicator of consumption growth," Applied Financial Economics, Taylor & Francis Journals, vol. 8(6), pages 627-635.
  12. Kim, Kenneth A. & Limpaphayom, Piman, 1997. "The effect of economic regimes on the relation between term structure and real activity in Japan," Journal of Economics and Business, Elsevier, vol. 49(4), pages 379-392.
  13. Mateus A. Feitosa & Benjamin M. Tabak, 2007. "Predictability Of Economic Activity Using Yield Spreads: The Case Of Brazil," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 029, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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