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Asymmetry in the link between the yield spread and industrial production: threshold effects and forecasting

Author Info

Listed author(s):
  • Ioannis A. Venetis

    (Centre of Planning and Economic Research (KEPE), Athens, Greece)

  • David A. Peel

    (Lancaster University Management School, UK)

  • Ivan Paya

    (Departamento Fundamentos Analisis Economico, University of Alicante, Spain)

Abstract

We analyse the nonlinear behaviour of the information content in the spread for future real economic activity. The spread linearly predicts one-year-ahead real growth in nine industrial production sectors of the USA and four of the UK over the last 40 years. However, recent investigations on the spread-real activity relation have questioned both its linear nature and its time-invariant framework. Our in-sample empirical evidence suggests that the spread-real activity relationship exhibits asymmetries that allow for different predictive power of the spread when past spread values were above or below some threshold value. We then measure the out-of-sample forecast performance of the nonlinear model using predictive accuracy tests. The results show that significant improvement in forecasting accuracy, at least for one-step-ahead forecasts, can be obtained over the linear model. Copyright © 2004 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.921
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 23 (2004)
Issue (Month): 5 ()
Pages: 373-384

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Handle: RePEc:jof:jforec:v:23:y:2004:i:5:p:373-384
DOI: 10.1002/for.921
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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  1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
  2. Simpson, Paul W & Osborn, Denise R & Sensier, Marianne, 2001. "Forecasting UK Industrial Production over the Business Cycle," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 20(6), pages 405-424, September.
  3. 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.
  4. 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 219-239, March.
  5. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
  6. Michael Dotsey, 1998. "The predictive content of the interest rate term spread for future economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 31-51.
  7. Edward Nelson, 2000. "UK monetary policy 1972-97: a guide using Taylor rules," Bank of England working papers 120, Bank of England.
  8. 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.
  9. 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.
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  11. 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.
  12. Frederique Bec, 2000. "Nonlinear Economic Policies: Pitfalls in the Lucas Critique Empirical Counterpart," Econometric Society World Congress 2000 Contributed Papers 1401, Econometric Society.
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  17. Tkacz, Greg, 2001. "Neural network forecasting of Canadian GDP growth," International Journal of Forecasting, Elsevier, vol. 17(1), pages 57-69.
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Cited by:

  1. Huseyin Kaya, 2013. "On the Predictive Power of Yield Spread for Future Growth and Recession: The Turkish Case," Working Papers 010, Bahcesehir University, Betam, revised Mar 2013.
  2. Schrimpf, Andreas & Wang, Qingwei, 2010. "A reappraisal of the leading indicator properties of the yield curve under structural instability," International Journal of Forecasting, Elsevier, vol. 26(4), pages 836-857, October.
  3. Bruno, Giancarlo, 2009. "Non-linear relation between industrial production and business surveys data," MPRA Paper 42337, University Library of Munich, Germany.

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