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The Predictive Power of the Yield Curve Across Countries and Time

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  • Menzie Chinn
  • Kavan Kucko

Abstract

type="main" xml:lang="en"> In recent years, there has been renewed interest in the yield curve (or alternatively, the term premium) as a predictor of future economic activity. In this article, we re-examine the evidence for this predictor for both the United States and other advanced economies. We examine the sensitivity of the results to the selection of countries, and to time periods. We find that the predictive power of the yield curve has deteriorated in the last half of the sample period, although there is evidence of a reversal in the lead-up to the Great Recession. There is reason to believe that European country models perform better than those with non-European countries when using more recent data. In addition, the yield curve proves to have predictive power even after accounting for other leading indicators of economic activity.

Suggested Citation

  • Menzie Chinn & Kavan Kucko, 2015. "The Predictive Power of the Yield Curve Across Countries and Time," International Finance, Wiley Blackwell, vol. 18(2), pages 129-156, June.
    • Handle: RePEc:bla:intfin:v:18:y:2015:i:2:p:129-156
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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

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