Predicting real growth and the probability of recession in the Euro area using the yield spread
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.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Bernard, Henri J & Gerlach, Stefan, 1998.
"Does the Term Structure Predict Recessions? The International Evidence,"
CEPR Discussion Papers
1892, C.E.P.R. Discussion Papers.
- Bernard, Henri & Gerlach, Stefan, 1998. "Does the Term Structure Predict Recessions? The International Evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(3), pages 195-215, July.
- Henri Bernard & Stefan Gerlach, 1996. "Does the term structure predict recessions? The international evidence," BIS Working Papers 37, Bank for International Settlements.
- Arturo Estrella & Frederic S. Mishkin, 1998.
"Predicting U.S. Recessions: Financial Variables As Leading Indicators,"
The Review of Economics and Statistics,
MIT Press, vol. 80(1), pages 45-61, February.
- Arturo Estrella & Frederic S. Mishkin, 1996. "Predicting U.S. recessions: financial variables as leading indicators," Research Paper 9609, Federal Reserve Bank of New York.
- Arturo Estrella & Frederic S. Mishkin, 1995. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc.
- M Sensier & M Artis & C R Birchenhall & D R Osborn, 2002.
"Domestic and International Influences on Business Cycle Regimes in Europe,"
The School of Economics Discussion Paper Series
0202, Economics, The University of Manchester.
- Sensier, Marianne & Artis, Michael & Osborn, Denise R. & Birchenhall, Chris, 2004. "Domestic and international influences on business cycle regimes in Europe," International Journal of Forecasting, Elsevier, vol. 20(2), pages 343-357.
- M Sensier & M Artis & C R Birchenhall & D R Osborn, 2002. "Domestic and International Influences on Business Cycle Regimes in Europe," Centre for Growth and Business Cycle Research Discussion Paper Series 11, Economics, The Univeristy of Manchester.
- Arturo Estrella & Gikas A. Hardouvelis, 1989.
"The term structure as a predictor of real economic activity,"
8907, Federal Reserve Bank of New York.
- Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
- Ray C. Fair, 1993. "Estimating Event Probabilities from Macroeconometric Models Using Stochastic Simulation," NBER Chapters, in: Business Cycles, Indicators and Forecasting, pages 157-178 National Bureau of Economic Research, Inc.
- Maximo Camacho & Gabriel Perez-Quiros, 2000.
"This Is What The Leading Indicators Lead,"
Computing in Economics and Finance 2000
132, Society for Computational Economics.
- G. Boero & E. Marrocu, 2001. "Evaluating non-linear models on point and interval forecasts: an application with exchange rate returns," Working Paper CRENoS 200110, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
- Hansen Bruce E., 1997.
"Inference in TAR Models,"
Studies in Nonlinear Dynamics & Econometrics,
De Gruyter, vol. 2(1), pages 1-16, April.
- Tom Doan, . "THRESHTEST: RATS procedure to perform Hansen's Test for Threshold Break," Statistical Software Components RTS00210, Boston College Department of Economics.
- Angel J. Ubide & Kevin Ross, 2001. "Mind the Gap; What is the Best Measure of Slack in the Euro Area?," IMF Working Papers 01/203, International Monetary Fund.
- James H. Stock & Mark W. Watson, 2001.
"Forecasting output and inflation: the role of asset prices,"
Federal Reserve Bank of San Francisco, issue Mar.
- James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
- James H. Stock & Mark W. Watson, 2001. "Forecasting Output and Inflation: The Role of Asset Prices," NBER Working Papers 8180, National Bureau of Economic Research, Inc.
- Francis X. Diebold & Robert S. Mariano, 1994.
"Comparing Predictive Accuracy,"
NBER Technical Working Papers
0169, National Bureau of Economic Research, Inc.
- Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
- Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
- Marianne Schulze-Gattas & Anne Marie Gulde, 1992. "Aggregation of Economic Indicators Across Countries; Exchange Rate versus PPP Based GDP Weights," IMF Working Papers 92/36, International Monetary Fund.
- Turnovsky, S.J., 1989.
"The Term Structure Of Interest Rates And The Effets Of Macroeconomics Policy,"
Discussion Papers in Economics at the University of Washington
89-03, Department of Economics at the University of Washington.
- Turnovsky, Stephen J, 1989. "The Term Structure of Interest Rates and the Effects of Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 321-47, August.
- Stephen J. Turnovsky, 1989. "The Term Structure of Interest Rates and the Effects of Macroeconomic Policy," NBER Working Papers 2902, National Bureau of Economic Research, Inc.
- Turnovsky, S.J., 1989. "The Term Structure Of Interest Rates And The Effets Of Macroeconomics Policy," Working Papers 89-03, University of Washington, Department of Economics.
- Abdurrahman Bekir Aydemir, 1998. "Forecast Performance of Threshold Autoregressive Models - A Monte Carlo Study," UWO Department of Economics Working Papers 9910, University of Western Ontario, Department of Economics.
- Benjamin M. Friedman & Kenneth N. Kuttner, 1998.
"Indicator Properties Of The Paper-Bill Spread: Lessons From Recent Experience,"
The Review of Economics and Statistics,
MIT Press, vol. 80(1), pages 34-44, February.
- Benjamin M. Friedman & Kenneth N. Kuttner, 1994. "Indicator Properties of the Paper-Bill Spread: Lessons from Recent Experiences," NBER Working Papers 4969, National Bureau of Economic Research, Inc.
- Benjamin M. Friedman & Kenneth N. Kuttner, 1994. "Indicator properties of the paper-bill spread: lessons from recent experience," Working Paper Series, Macroeconomic Issues 94-24, Federal Reserve Bank of Chicago.
- Bai, Jushan, 1999. "Likelihood ratio tests for multiple structural changes," Journal of Econometrics, Elsevier, vol. 91(2), pages 299-323, August.
- Peel, David A & Taylor, Mark P, 2002. "Covered Interest Rate Arbitrage in the Interwar Period and the Keynes-Einzig Conjecture," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 51-75, February.
- Joseph G. Haubrich & Ann M. Dombrosky, 1996. "Predicting real growth using the yield curve," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 26-35.
- 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.
- Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2000. "How stable is the predictive power of the yield curve? evidence from Germany and the United States," Staff Reports 113, Federal Reserve Bank of New York.
- Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, March.
- Moneta, Fabio, 2003. "Does the yield spread predict recessions in the euro area?," Working Paper Series 0294, European Central Bank.
- Galvão, Ana Beatriz C., 2003. "Structural Break Threshold VARs for Predicting US Recessions using the Spread," Insper Working Papers wpe_39, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
- Sonsoles Castillo & Fernando C. Ballabriga, 2003. "BBVA-ARIES: a forecasting and simulation model for EMU," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 22(5), pages 411-426.
- Davis, E Philip & Fagan, Gabriel, 1997. "Are Financial Spreads Useful Indicators of Future Inflation and Output Growth in EU Countries?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 701-14, Nov.-Dec..
- Anderson, H.M. & Vahid, F., 2000.
"Predicting the Probability of a Recession with Nonlinear Autoregressive Leading Indicator Models,"
Monash Econometrics and Business Statistics Working Papers
3/00, Monash University, Department of Econometrics and Business Statistics.
- Anderson, Heather M. & Vahid, Farshid, 2001. "Predicting The Probability Of A Recession With Nonlinear Autoregressive Leading-Indicator Models," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 482-505, September.
- Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
- Donald W.K. Andrews, 1990.
"Tests for Parameter Instability and Structural Change with Unknown Change Point,"
Cowles Foundation Discussion Papers
943, Cowles Foundation for Research in Economics, Yale University.
- Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
- Michael J. Dueker, 1997. "Strengthening the case for the yield curve as a predictor of U.S. recessions," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 41-51.
- Tkacz, Greg, 2001. "Neural network forecasting of Canadian GDP growth," International Journal of Forecasting, Elsevier, vol. 17(1), pages 57-69.
- van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 0011, European Central Bank.
- John W. Galbraith & Greg Tkacz, 1999.
"Testing For Asymmetry In The Link Between The Yield Spread And Output In The G-7 Countries,"
Departmental Working Papers
1999-02, McGill University, Department of Economics.
- Galbraith, John W. & Tkacz, Greg, 2000. "Testing for asymmetry in the link between the yield spread and output in the G-7 countries," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 657-672, October.
- Ana Beatriz C. Galvao, 2006. "Structural break threshold VARs for predicting US recessions using the spread," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(4), pages 463-487.
- Gabriel Fagan & JÊrÆme Henry, 1998. "Long run money demand in the EU: Evidence for area-wide aggregates," Empirical Economics, Springer, vol. 23(3), pages 483-506.
- Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:intfor:v:21:y:2005:i:2:p:261-277. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.