The yield spread and GDP growth - Time Varying Leading Properties and the Role of Monetary Policy
AbstractThe yield spread is a well documented leading indicator of GDP growth. Estrella (2005) proposes a model to explain this relationship. Within the model, the leading properties of the yield spread are determined by the monetary policy. Accordingly, changes of the leading properties that have been reported in many studies should correspond to changes of the monetary policy. This paper analyzes whether and what form of time variation of the leading properties can be found in four major industrialized countries (France, Germany, the UK and the US). The results are connected with time varying behavior of the monetary policy by modeling a joint state dependency of the leading properties and the reaction parameters of the monetary policy. Time variation of the leading properties seem to exist in all countries under consideration. For the US and Germany they are best modeled as a structural break while France and the UK exhibit recurring phases. Evidence for a link between the time variations of the monetary policy and the leading properties can be found. However, a clear determination of the leading properties by the monetary policy cannot be confirmed. --
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Bibliographic InfoPaper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2007,12.
Date of creation: 2007
Date of revision:
leading indicator; yield spread; GDP growth; monetary policy; Markov-Switching;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-30 (All new papers)
- NEP-CBA-2007-06-30 (Central Banking)
- NEP-EEC-2007-06-30 (European Economics)
- NEP-MAC-2007-06-30 (Macroeconomics)
- NEP-MON-2007-06-30 (Monetary Economics)
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