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Predicting real growth and the probability of recession in the Euro area using the yield spread

  • Duarte, Agustin
  • Venetis, Ioannis A.
  • Paya, Ivan

Although the spread has been established as a leading indicator of economic activity, recent studies on US and EU countries have documented, theoretically and empirically, that the term spread-output growth relationship may not be stable over time and it may be subjected to nonlinearities. Using aggregate data for the Euro area over the period 1970:1 - 2000:4, we applied linear regression as well as nonlinear models to examine the predictive accuracy of the term spread-output growth relationship. Our results confirm the ability of the yield curve as a leading indicator. Moreover, significant nonlinearity with respect to time and past annual growth is detected outperforming the linear model in out-of-sample forecasts of one-year-ahead annual growth. Furthermore probit models that use the EMU and US yield spreads are successful in predicting EMU recessions.

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Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 21 (2005)
Issue (Month): 2 ()
Pages: 261-277

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Handle: RePEc:eee:intfor:v:21:y:2005:i:2:p:261-277
Contact details of provider: Web page: http://www.elsevier.com/locate/ijforecast

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